Trusts, Taxes, and You

Many of my clients ask me about trusts and whether they should have one. Yes, you should! A trust protects your estate for your beneficiaries, reduces or eliminates taxes, provides for managing your estate should you be become incapable of doing so, avoids probate, avoids your will being contested, and protects the privacy of your estate (wills and probate are public proceedings.)

A trust is a document that spells out the rules you want followed for property held on behalf of your beneficiaries. It essentially allows you to determine how you want your estate to be handled after your death or if you should become incapacitated.

For the purposes of a trust, property can be either real or personal. Real property is land or buildings. Personal property is considered to be all others:furniture, jewelry, art, clothing, etc. Investments are also considered to be personal property.

Because there are several types of trusts, you need to examine which one will best protect your property and to consider the legal and financial consequences of each.You also need weigh how the trust will handle taxes.

When selecting a trust, the information below will be helpful:

• The trust files an annual tax return (IRS Form 1041) to report:
• Income, deductions, gains, losses, etc. of the trust
• Income for future or current distribution to beneficiaries
• Income tax liability
• Employment taxes on wages paid to household employees
• In order to prepare the tax return, the trust must have a Federal Employer Identification Number (FEIN). You’ll also need to provide the following to your tax preparer:
• Any income reported to the trust
  • Sales of assets such as stocks and real estate, interest, dividends, cash out of any annuities that name the trust as the beneficiary, etc.
  • Often, the death happens mid-year, and the income does not all correctly report. In this case, nominee notations are made on the deceased’s return to transfer the income to the trust
• Any expenses of the trust (generally, this includes costs to administer the trust)
• Trustee fees
• Attorney fees
• Tax preparer fees
• Office supplies, etc.
• Costs to maintain assets owned by the trust
• Property taxes
• Property insurance
• Repairs/maintenance of real estate
• Investment fees, etc.
• Personal expenses of the deceased are not generally deductible by the trust, though they are appropriate distributions of the trust
• Funeral expenses
• Final personal bills
• The trust generally does not pay income taxes. This information is “passed through” to the beneficiaries on Schedule K-1.
• Schedule K-1 contains detailed information about the type of income, deductions, gains, losses, etc. for the purpose of accurately reporting their share of the trust on their own tax returns.
• Beneficiaries ONLY pay taxes on the net income they receive of the trust. The principal amount of the inheritances is tax free.
• If the expenses are more than the income, the expenses are held until the final year of the trust at which time the expenses pass through to the beneficiaries on the final K1.
• You will need to have the following information regarding the beneficiaries:
• Name
• Address
• Social Security Number
• Birthdate
• Percentages of inheritance

To Trust or Not to Trust

As I mentioned, there are many factors to consider when deciding on whether or not you want a trust and which trust is right for you. If you want to discuss the implications of having a trust, please call us to set up a free consultation. We are here to help you!