How Do Trusts Help You Save on Taxes?

June 23, 2020
How Do Trusts Help You Save on Taxes?

Many people come to us curious (or confused) about trusts and taxes. So today’s article is going to sort it out and clarify things for you.
There are two types of trusts, and each have different tax consequences.

Revocable trusts, which are the far more commonly used trusts, have no tax consequences whatsoever. A revocable trust has your social security number as it’s tax identifier, and is not a separate entity from you for tax purposes.

It is a separate entity from you for purposes of probate, meaning if you become incapacitated or die your Trustee can take over without a court order, keeping your family out of court. But, until your death, it’s treated as invisible from a tax perspective. At the time of your death, if your revocable trust provides for the creation of irrevocable trusts, then the tax implications will shift.

When you have an irrevocable trust, either created during life, at death through a revocable living trust, or through a will that creates a trust, that trust has its own EIN, or employer identification number (also called a TIN or taxpayer identification number). Generally, it pays income taxes on income earned by the trust, as if it’s a separate tax paying entity.

Trust income is taxed at the highest tax bracket applicable to individuals as soon as there is over $12,950 of income, so in some cases a trust can be drafted to provide that the tax consequences pass through to the beneficiary and are taxed at his or her income rates, which are often lower than the trust tax rate.

We will often do this when creating a Lifetime Asset Protection Trust for a beneficiary, so that the trust can provide the benefits of credit protection from lawsuits, divorce, or even bankruptcy, but not have the negative tax consequence of the highest tax rates on very little income.

Of course, if you have a trust, and you want us to review it for the income tax consequences to your loved ones after your death, please contact us.

Now, let’s talk about ESTATE TAXES. Currently, if you die with assets over $11.58M, then your estate will be subject to estate tax on all amounts over that $11.58M at the rate of 40%. Yep, 40% will go to the government. You can reduce these taxes, or even eliminate them by using various planning methods, most of which are fairly complex, but worth it if you can save your family that 40% estate tax. Keep in mind that this is only the federal estate tax. Some states have their own, additional estate tax levy.

If you live in a state that has its own estate tax, the exemption level is likely lower (all amounts over $5M, for example), so it would tax more of your estate which means even less for your beneficiaries.

If you are trying to figure out whether an irrevocable trust, or a revocable trust or even a Lifetime Asset Protection Trust is best for you and your beneficiaries, we, as your Personal Family Lawyer®, can help you weigh that decision and make the right choice for yourself and the people you love.

This article is a service of Casey Schwartz, Personal Family Lawyer®. We don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That’s why we offer a Life & Legacy Planning Session, during which you will get more financially organized than you’ve ever been before, and make all the best choices for the people you love. You can begin by calling our office today to schedule a Life & Legacy Planning Session and mention this article to find out how to get this $750 session at no charge.

Casey Schwartz - Estate Planning Attorney Charleston, SC

Schwartz Legacy Planning, LLC

We’re estate planning attorneys who help South Carolina and Maryland families protect their loved ones from court and conflict.

Recent Posts

10 Steps to Take Now to Secure a Comfortable Retirement: Part 2

Welcome back to our discussion on securing a comfortable retirement! In the first part of this series, we explored essential steps including estate planning, preparing for long-term care, and passing on your legacy. As we continue with the second part of our series,...

10 Steps to Take Now to Secure a Comfortable Retirement: Part 1

Retirement is more than just an end to the working years; it's an exciting new phase of life that requires thoughtful preparation and strategic planning. Since May is Older Americans Awareness Month, it's the perfect opportunity to explore 10 steps you can take now to...

Estate Planning: A Gift of Peace and Power for Every Mother

Moms spend their days and nights thinking about how to make sure their children are happy, healthy, and safe. If you’re a mom, you know. If you aren’t a mom, you were born because of a mom. It’s one of the two things we all have in common.  So, as  Mother’s Day...

You might also like…