How Can Setting Up a Trust Have Tax Benefits For My Beneficiary?

How Can Setting Up a Trust Have Tax Benefits For My Beneficiary?The majority of people set up a will to have their assets distributed as per their wishes on their demise. With that said, you may want to set up a trust even if you want to save taxes. Estate planning offers tremendous unique benefits where taxes are concerned. Trusts are taxable at both federal and state level. You should consider working with an attorney to understand the various tax benefits you can receive by setting up a trust. 

Stellar and accomplished attorneys at SBEMP (Slovak, Baron, Empey, Murphy & Pinkney) law firm provides professional legal advice and services to clients in Palm Springs, Palm Desert, Rancho Mirage, Inland Empire, Orange County, Coachella Valley, Costa Mesa, San Diego, New Jersey, New York, and surrounding locations.

Overview of a Trust

Trust is a legal contract drafted by a lawyer for managing assets as per your wishes. There will be a named trustee on the document that manages the trust during your lifetime and following your death. Most states have a way of taxing trusts while others don’t tax them at all. Tax rules related to filling requirements, tax rates, and what constitutes a resident trust for each state differ.

Taxing of Trust Funds

Tax benefits in trust funds are different depending on the structure. Tax deduction is permitted by the IRS on any income distributed to beneficiaries through trust funds. The beneficiary in this case pays the income tax on the overall taxable amount instead of the trust alone. 

Distributions to beneficiaries come from the income of the current year before the principal. Distributions from principals are nontaxable since the taxes have already been paid on them. Capital gains owing to the trust may be taxable in the hands of the trust or the beneficiary. Amounts distributed to the beneficiary becomes taxable up till the amount claimed by the trust as deduction. 

The income tax in case the deduction or income is part of the estate’s distributable income or change in the principal gets paid by the trust and is not passed to the beneficiary. Irrevocable trust usually retains earnings. These trusts have the discretion of paying trust tax of $3,146 plus 37% of amounts exceeding $13,050.2

Tax Benefits in Trusts

Trusts can either be revocable or irrevocable. This essentially means that they can either be amended once they are created or not. Revocable trusts allow the option to make changes once you have signed it whereas irrevocable trusts do not. Since you have transferred assets from your estate, you may be able to enjoy transfer tax benefits in case of irrevocable trust.

Contributions to the trust may be subject to gift tax requirements. Assets placed in the trust may be sheltered from estate tax if certain conditions are met. You can make annual exclusion gift in addition to initial funding to the irrevocable trust. This is without having to pay additional gift tax on the contribution. 

Currently, the gift tax exemption rate is up to $30,000 for married couples and $15,000 for individuals. You should consider speaking with an attorney about the type of trust that will best serve your purposes of reducing your tax burden. 

Reliable and the all-star lawyers at the SBEMP law firm serve clients from Palm Springs, Palm Desert, Rancho Mirage, Inland Empire, Orange County, Coachella Valley, Costa Mesa, San Diego, New Jersey, New York, and nearby locations for a range of legal practice areas.

Have any legal questions? Contact the Attorneys at SBEMP Law Firm: 

For more information or to request a consultation please contact the law offices of SBEMP (Slovak, Baron, Empey, Murphy & Pinkney) by clicking here. 

SBEMP LLP is a full service law firm with attorney offices in Palm Springs (Palm Desert, Inland Empire, Rancho Mirage, Indian Wells), CA; Indian Wells, CA; Costa Mesa (Orange County), CA; San Diego, CA; New Jersey, NJ; and New York, NY.

DISCLAIMER: This blog post does not constitute legal advice, and no attorney-client relationship is formed by reading it. This blog post may be considered ATTORNEY ADVERTISING in some states. Prior results do not guarantee a similar outcome. Additional facts or future developments may affect subjects contained within this blog post. Before acting or relying upon any information within this newsletter, seek the advice of an attorney.

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