By Sandra K. Dennison, CPA
A recent article in the Wall Street Journal describes a strategy to avoid taxes when you put money into a trust and when you take it out. Here’s a summary of how it works:
In cases where Mom & Dad’s trust has a higher tax bracket than their beneficiary’s, there is an opportunity to save tax dollars. Trusts have fewer tax brackets and higher tax rates than individuals who have more tax brackets and lower tax rates. Consider that a trust with as little as $12,150 in assets pays the maximum tax rate – 43.4% while individuals can earn over $400,000 before they pay 43.4%. It seems clear that paying at the individual tax rate is better than paying the trust rate, in most cases.
You also have the option to look at which tax strategy (trust or individual) makes the most sense – if you get it done in the first 65 days of the year. This extended “decision time” is only available to trusts and beneficiaries.
Although appealing, distributions should not be made just for the sake of tax saving and certainly not without expert counsel. Distributing funds from a trust could produce negative consequences that far outweigh the tax savings. Respect for the purpose of the trust is more important.
Read more at: “How a Trust Can Cut Taxes” written by Arden Dale for the Wall Street Journal.