Trust Tax Rates -(Simple/Complex).

[wolf]

Taxable income, over $12,300, Tax is: $3,179.50 plus 39.6% of the excess over $12,300.

Young adults, (19-22), will inherit sizeable estate. (rental real estate/CD's/IRA).

Understand, if the Trust income is distributed, the income is taxed at the
recipient 's tax rate.

How have you guys handled this situation. More of an estate planning situation and young adults to young to handle large sums of money.

 

[Gill]

You want to distribute income from the trust rather than accumulate it. Trust tax rates are designed to discourage accumulation of income.
Bruce



Sent from my iPad using Early Retirement Forum

 

[bingybear]

I agree with MBMiner. While I'm alive the taxes are at my rate. Upon my death the rate will jump... so I have a little time to plan.
The other thing is it is undistributed income that is taxed at trust rates. So how can you let the value grow without having high income levels?

 

[Texas Proud]

The other thing that you can do inside the trust is invest where there is less income.... less income, less taxes...



That is one of the trade offs a trustee has to handle, do I generate higher income now for the income person and have a smaller distribution when it is time, or do the opposite...

 

[Options]

Taxable income, over $12,300, Tax is: $3,179.50 plus 39.6% of the excess over $12,300.

Young adults, (19-22), will inherit sizeable estate. (rental real estate/CD's/IRA).

Understand, if the Trust income is distributed, the income is taxed at the
recipient 's tax rate.

How have you guys handled this situation. More of an estate planning situation and young adults to young to handle large sums of money.

Just went through this as I revoked an earlier trust and created a new one (made substantial changes to bequest structure so revocation of old trust was warranted). My situation is pretty straightforward, although it was a lot of work to complete the process. Although I won't share details, it was possible for me to handle everything myself, after having this 480-page book from Nolo on estate planning (twice!):

Plan Your Estate - Legal Estate Planning Book - Nolo

As your heirs are young adults and your estate involves real estate, I'd recommend seeing an estate attorney. You have "controls over property issues", tax issues, among others, and as such, there are many moving parts involved. One thing I learned after having read the Nolo book was how complex estate planning can be and how easy it is to make some pretty big mistakes. In my case, my earlier trust would have been a nightmare for my executor to distribute (which is why I revoked/replaced it).

I'd see an attorney and even then, I'd read the book as well so you know what questions to ask and in order to optimize the totality of your estate planning. This includes POA's, HPOA's, end of life healthcare decisions, buriel preparations, etc. Even though it's a lot of work, you'll be glad you did it and rest easy when it's all over knowing your estate has been handled.

 

[ERD50]

Just went through this as I revoked an earlier trust and created a new one (made substantial changes to bequest structure so revocation of old trust was warranted). My situation is pretty straightforward, although it was a lot of work to complete the process. Although I won't share details, it was possible for me to handle everything myself, after having this 480-page book from Nolo on estate planning (twice!):

Plan Your Estate - Legal Estate Planning Book - Nolo

...

I'd see an attorney and even then, I'd read the book as well so you know what questions to ask and in order to optimize the totality of your estate planning. This includes POA's, HPOA's, end of life healthcare decisions, buriel preparations, etc. Even though it's a lot of work, you'll be glad you did it and rest easy when it's all over knowing your estate has been handled.

I agree very much with the part I bolded. The NOLO books (and/or other resources) are great to get you up to speed to understand what the lawyers are telling you (or maybe give you enough confidence to DIY).

-ERD50

 

[Options]

While you're working on your estate, I also recommend preparing what is known as a "death book" (morbid, I know). A DB provides every personal/financial detail about you that your executor will need in finalizing your estate. The Nolo Plan Your Estate book recommends something of this sort, but I would go further and think through what your executor will have to go through in winding up your estate (including going through the contents of a possibly cluttered house; this is also an excellent time to simplify).

For the DB, here's an excellent resource (he calls it The Big Book of Everything), and what I used:

Erik A. Dewey

If you scroll down, you can download the DB in excel format. It took some time for me to complete, but I am now confident (and relieved) to know my executor will have all required information in one place. This will facilitate closing the estate quickly.

As the DB contains extensive personal/financial information, I placed it on identical encrypted thumb drives, with extra thumb drive copies in my safe deposit box (along with the originals of my trust).

 

[steelyman]

I can't add anything of value to this, but I appreciate reading the tips and pointers. I was advised to wait on seeing an estate planning pro until after I'd finished a move from one state to another, to make sure everything was relevant to the new state.

For me, these sorts of threads are a big bonus that comes with scanning the site. I've lost track of recommendations on products that have helped me (hey, it's grilling time - where's that Thermapen?).

 

[Dancfo]

Don't forget to differentiate between "ordinary income" and capital gains, along with Simple vs Complex trusts. In general, a simple trust is required to distribute income. Income is normally identified as dividends, interest, etc. Taxable income liability is "distributed" to the beneficiary on the K-1. A complex trust is one that does not require the distribution of income. Therefore, taxable income liability is only "distributed" to the extent there are distributions from the trust. Income retained in a complex trust is taxed at the compressed tax rates.


Now - regardless of the type of trust, capital gains are normally taxed to the trust (in a simple or complex trust). They are taxed at the same rates as individuals, except that you reach the 20% bracket very quickly.


Some trusts and elections you can make will allow you to also distribute the capital gains tax liability to the beneficiaries. This could be very helpful if the beneficiary has some loss carry-forwards to help offset capital gains in the trust. Also, you normally cannot distribute trust losses - only offset future gains.


Of course, there are several exceptions to all of these points (such as grantor-type taxed irrevocable trusts), but this is generally how it works.

 

[Dancfo]

Second Post - I'm biased because I do this for a living. As others advised - you need to see an attorney that specializes in this practice. Don't go to a real-estate attorney for instance. One of the biggest considerations is who to name as a trustee. Also - if the funds are going to remain in trust, the parameters under which the funds are distributed can override the tax issues. Tax reduction is important, but you don't want to distribute money to individuals that can't handle the funds - unless that is not a concern.
It can be difficult to place one family member in-between another family member and money. A recipe for family discord. Consider an objective 3rd party for a trustee, even if they serve as a co-trustee.
Also - if you have rental real estate, make sure the trustee can manage those assets. Be careful with the IRA beneficiary designations. Is the trust named the beneficiary? Are there more than one beneficiaries? If so, does the IRA name separate trusts? You can lose out on IRA stretch options if you mess up the bene designation.


Lots of stuff to think about. But as the other poster mentioned, you can feel better once you're done.