Do You Pay Taxes on Wedding Gifts?

April 9, 2024

You are a father whose son is getting married. You want to provide a wonderful wedding gift that your son and his bride will cherish and enjoy. Do you pay taxes on wedding gifts? A generous gift for a child’s wedding doesn’t necessarily cause a tax problem unless your lifetime gifts are over the lifetime exclusion limit, which is extremely high right now. A recent article from Yahoo! Finance, “Do I Need to Worry About the Gift Tax If I Pay $60,000 Toward My Daughter’s Wedding?” says most Americans won’t have to worry about the gift tax.

In 2024, the lifetime exclusion is $13.61 million per person and $27.22 million for a married couple. Unless you’ve gone above and beyond these limits, you can make as many gifts as you like to anyone you choose without worrying or paying the 18% to 40% federal gift tax.

But there’s one thing to remember: if you make a gift over the annual gift limit, which is $18,000 per person in 2024 or $36,000 for a married couple, you need to send the IRS Form 709. The form should be submitted even if no gift taxes are due. It’s a simple and smart move.

How do gift taxes work? The federal gift tax doesn’t come into play often. Most gifts are tax-free simply because of the size of both the annual and lifetime gift exclusions. You can gift freely if you keep the limit in mind.

The lifetime exclusion for gift and estate taxes is so high right now that few Americans need to worry about it. If you are generously minded, you may gift $13.61 million (individual) and $27.22 million (married couple). The lifetime exclusion is just as it sounds: the number of gifts you may give during your life or as part of your federal estate.

If you are charitable-minded, you may make many contributions. There are no gift taxes levied on charitable donations, gifts to spouses or dependents, or gifts to political parties. As long as you pay directly to the institutions, there are no taxes on college tuition or healthcare expenses.

There are some strategies to manage the gift tax. One would be to split your $60,000 gift between your daughter and her fiancé. Both gifts would be under the 2024 $36,000 per person exclusion, assuming you are married, so there would not be a gift tax.

Another tactic is to spread the gift out over a few years. Let’s say you’re a single parent. You could gift your daughter and her fiancé $15,000 each this year and next, keeping you below the $18,000 annual gift tax exclusion.

If you’ve already given a gift of $60,000 to your daughter and made gifts over and above the $13.61 million lifetime exclusion, speak with your estate planning attorney to determine where you fall in the gift tax brackets and how much you’ll need to pay.

The easiest way to avoid gift taxes is to pay the vendors directly, but this depends on your overall situation. For instance, where is the money coming from—tax-deferred accounts or investment accounts? It would be wise to talk with your estate planning attorney before making a large gift. Do you pay taxes on wedding gifts? If you have a wedding coming up and are concerned about gift taxes, you can pay the vendors directly rather than giving money directly to the happy couple. If you would like to read more about the gift tax, please visit our previous posts.

Reference: Yahoo! Finance (March 14, 2024) “Do I Need to Worry About the Gift Tax If I Pay $60,000 Toward My Daughter’s Wedding?”

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The Estate of The Union Season 3|Episode 3 is out now!

March 21, 2024

The Estate of The Union Season 3|Episode 3 is out now! Taxes come in all favors. Sales taxes, excise taxes, capital gains taxes, etc. We are all concerned about our income taxes as we approach April 15th. Many of us will believe we pay way too much, and nobody will feel like they should pay more! But there’s another tax to be concerned about: The Death Tax.

In this edition of The Estate of the Union, Brad Wiewel dissects the Death tax and it’s first cousin, the Gift Tax and explains them in a way that everyone can understand. He also sheds like on what is going to happen on January 1, 2026 – unless Congress changes the law; so, stand by!

In each episode of The Estate of The Union podcast, host and lawyer Brad Wiewel will give valuable insights into the confusing world of estate planning, making an often daunting subject easier to understand. It is Estate Planning Made Simple! The Estate of The Union Season 3|Episode 3 is out now! The episode can be found on Spotify, Apple podcasts, or anywhere you get your podcasts. If you would prefer to watch the video version, please visit our YouTube page. Please click on the links to listen to or watch the new installment of The Estate of The Union podcast. We hope you enjoy it.

Texas Trust Law focuses its practice exclusively in the area of wills, probate, estate planning, asset protection, and special needs planning. Brad Wiewel is Board Certified in Estate Planning and Probate Law by the Texas Board of Legal Specialization. We provide estate planning services, asset protection planning, business planning, and retirement exit strategies.

When Gift Tax Return Should Be Filed

March 20, 2024

Gift tax returns may be the most misunderstood and overlooked part of estate planning. The first mistake people make, according to the article “Know The Most Misunderstood Part Of Estate Plans: Gift Tax Returns” from Forbes, is not knowing when a gift tax return should be filed. Even if a gift you make is tax-free, you might have to file a return anyway. And there are times when you aren’t required to file a gift tax return, but it’s still a good idea to do so.

The gift tax return is IRS Form 709, which can be downloaded from the IRS website at no cost.

In most cases, the IRS can’t take action on an incorrect gift tax return once more than three years have passed since it was originally filed. There are exceptions for fraudulent returns or if a return is either missing information or substantially misstates information.

However, there’s no statute of limitations if you fail to file a gift tax return, and the IRS can raise questions about the transaction at any time. This includes coming after your heirs or your estate after you’ve passed. At that time, your heirs or executor may not have the evidence to prove you complied with the tax law. The IRS would be within its rights to assess not only the gift tax but also penalties and interest for all the years from the date of the gift tax filing to the current date.

For this reason alone, it’s a good idea to file a gift tax return if there’s even the slightest question of whether it’s necessary.

Form 709 has a section for reporting “non-gift transactions.” Some estate planning attorneys recommend taking advantage of this to start the statute of limitations clock ticking and prevent the IRS from recharacterizing your gift years later as a taxable gift.

Consider this especially when you sell assets to a trust or shift assets from one irrevocable trust to another, known as “decanting” a trust. Consider also filing a gift tax return for a non-gift if you take advantage of the generation-skipping transfer tax exemption through a trust.

Another common mistake is not realizing that certain actions are considered gifts by the IRS, whether in the general sense or not. Let’s say you sell an asset to your children at less than market value. The difference between the selling price and the market value is a gift. So is forgiving or making a loan at a below-market interest rate.

If parents pay bills for adult children, this might be considered a gift if the gifts are valuable or if you also make significant gifts of money or property to the same person in the same year.

A gift tax issue the IRS pays close attention to is valuation. There’s not much question about the value of a publicly traded security, but for many other assets, there’s a lot of room to question the correct value, and the gift tax is based on the asset value at the time the gift is made.

While spouses may make unlimited gifts to each other tax-free, there are times when gifts between spouses must be reported. One time is when the gift is defined in the tax code as a “terminable interest.” Another time is if one spouse is not a U.S. citizen. Gifts to that spouse from the other spouse exceeding a certain amount during the year must be reported on IRS Form 709.

It’s always a good idea to check with your estate planning attorney about when a gift tax return should be filed to protect yourself and your heirs. If you would like to read more about gifting and estate planning, please visit our previous posts.

Reference: Forbes (Feb. 16, 2024) “Know The Most Misunderstood Part Of Estate Plans: Gift Tax Returns”

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Crummey Trusts are an Option to Gift to Minors

March 18, 2024

If you’re looking for ways to pass wealth on to children or grandchildren, one valuable tool to consider may be the Crummey Trust. Crummey Trusts represent a strategic option for those looking to gift assets to minors. Named after the first individual to utilize this approach, the Crummey Trust offers a way to gift money to minors while enjoying significant tax advantages and maintaining control over the funds’ distribution.

A Crummey Trust allows you to gift assets to minors without those gifts being subject to gift tax up to a certain amount annually. As of 2024, you can give up to $18,000 annually to a minor through a Crummey Trust without incurring gift tax or affecting your lifetime gift tax exemption. This type of trust is particularly appealing because it prevents the minor from gaining direct access to the funds until they reach an age where they can manage the money responsibly.

A Crummey Trust operates on the concept of “present interest” gifts. For a gift to qualify for the annual gift tax exclusion, the recipient must have the right to use, possess, or enjoy the gift immediately. Crummey Trusts meet this requirement by allowing the beneficiary a temporary right to withdraw the gifted amount, typically within a 30-day window after the gift is made. If the withdrawal right is not exercised, the funds remain in the trust, subject to the terms set by the grantor.

While Crummey Trusts offer many advantages, they also require diligent record-keeping and clear communication with beneficiaries about their rights. Additionally, as beneficiaries age, they may choose to exercise their withdrawal rights, which could impact the grantor’s willingness to continue making gifts to the trust.

Crummey Trusts represent a strategic option for those looking to gift assets to minors while maintaining control over the distribution of those assets and optimizing tax benefits. By understanding the unique features and requirements of Crummey Trusts, you can make informed decisions that align with your estate planning goals and provide for your loved ones’ futures. If you would like to learn more about gifting, please visit our previous posts.

Reference: ElderLawAnswers “Crummey Trust: A Safe Way to Give Financial Gifts to Minors”

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Pitfalls of Adding a Child to Your Home’s Deed

February 20, 2024

As an estate planning attorney, I’ve witnessed many parents consider adding a child to the deed of their home with good intentions. They often view this as a simple strategy to ensure that their property seamlessly passes to their children without the complexities of probate. However, this well-intentioned move can lead to numerous unexpected complications and financial burdens. This article explains the pitfalls of adding a child to your home’s deed might not be the optimal choice for your estate plan.

To begin, let’s clarify what it means to add a child to the deed of your home. By doing this, you are legally transferring partial ownership rights to your child. This action is commonly perceived as a method to circumvent probate. However, it is imperative to understand that it also entails relinquishing a degree of control over your asset.

When you add your child to the deed, you are not just avoiding probate; you are creating a co-ownership situation. This means your child gains legal rights over the property, equal to yours. Such a shift in ownership can have significant legal ramifications, particularly if you need to make decisions about the property in the future.

Avoiding probate is often cited as the primary reason for adding a child to a home’s deed. Probate can be a lengthy and sometimes costly process. However, it’s essential to weigh these concerns against the potential risks and challenges of joint ownership. Probate avoidance, while seemingly beneficial, does not always equate to the most advantageous approach. The process of probate also serves to clear debts and distribute assets in a legally structured manner. By bypassing this process, you might be opening the door to more complicated legal and financial issues in the future.

One of the most overlooked aspects of adding a child to your deed is the gift tax implications. The IRS views this act as a gift. It’s important to understand that the IRS has established specific rules regarding gifts. If the value of your property interest exceeds the gift tax exclusion limit, you might be required to file a gift tax return. This could potentially lead to a significant tax liability, an aspect often not considered in the initial decision-making process.

The loss of control over your property is a critical consideration. Once your child becomes a co-owner, they have equal say in decisions regarding the property. This change can affect your ability to sell or refinance the property and can become particularly problematic if your child encounters financial issues. In a co-ownership scenario, if your child faces legal or financial troubles, your property could be at risk. Creditors might target your home for your child’s debts, and in the case of a child’s divorce, the property might become part of a marital settlement. Adding a child to your deed can inadvertently lead to family disputes and legal challenges, especially if you have more than one child. Equal distribution of assets is often a key consideration in estate planning to maintain family harmony.

A significant financial consideration is the potential capital gains tax burden for your child. When a property is inherited, it usually benefits from a step-up in basis, which can significantly reduce capital gains tax when the property is eventually sold. However, this is not the case when a child is added to a deed. Without the step-up in basis, if your child sells the property, they may face a substantial capital gains tax based on the difference between the selling price and the original purchase price. This tax burden can be considerably higher than if they had inherited the property.

There are several alternatives to adding a child to your home’s deed. Creating a living trust, for instance, allows you to maintain control over your property while also ensuring a smooth transition of assets to your beneficiaries. A living trust provides the flexibility of controlling your assets while you’re alive and ensures they are distributed according to your wishes upon your death. This approach can also offer the benefit of avoiding probate without the downsides of directly adding a child to your deed.

Given the complexities and potential pitfalls of adding a child to your home’s deed, seeking professional legal advice is essential. An experienced estate planning attorney can help navigate these complexities and tailor a plan that aligns with your specific needs and goals.

While adding a child to your home’s deed might seem straightforward to manage your estate, it’s fraught with potential problems and complications. It’s vital to consider all the implications and seek professional guidance to ensure your estate plan is effective, efficient and aligned with your long-term intentions. If you would like to learn more about managing real property in your estate plan, please visit our previous posts.

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Endowed Scholarships create an Important Legacy

February 15, 2024

Endowed scholarships are powerful tools in the realm of charitable giving, often used as a part of comprehensive estate planning. An endowed scholarship is a significant philanthropic commitment that involves establishing a fund to provide scholarships to students, typically in perpetuity. It’s a donation and a long-term investment in future generations, aligning with the donor’s values and interests. Endowed scholarships can be established during a donor’s lifetime or through estate gifts, allowing individuals to create an important legacy reflecting their passion for education and student support. For a detailed overview of how endowed scholarships function within charitable giving and estate planning, see The National Association of Charitable Gift Planners.

To endow a scholarship means providing a stable funding source by creating an endowment fund. An endowment fund is typically a large sum of money that is invested. The earned income from the investments is used to fund the scholarship. The principal amount of the endowment remains intact, allowing the scholarship to be awarded yearly indefinitely, based on the income generated.

In estate planning, establishing an endowed scholarship can offer a meaningful way to memorialize a loved one or to honor family and friends, while also providing tax benefits. It serves as a lasting testament to the donor’s commitment to education and charitable giving, ensuring that their philanthropic goals continue to be met even after they are gone.

Establishing an endowed fund involves careful planning and collaboration with financial or philanthropic advisors. The donor needs to decide on the amount to endow, which should align with their financial capabilities and the objectives of the scholarship. The process also involves legal considerations, since the terms of the scholarship and the fund’s administration must be clearly defined and documented. A comprehensive guide on endowment funds can be found at The Council on Foundations.

Legal and financial planning is crucial in creating a scholarship fund. This involves drafting the terms of the scholarship, deciding on the fund’s management and ensuring that the scholarship aligns with the overall estate plan. The donor must also work with the chosen educational institution or charitable organization to set up the fund and define how the scholarship will be administered.

There are numerous benefits to establishing an endowed scholarship for both the donor and the recipients. From a donor’s perspective, endowed scholarships provide a way to make a significant, lasting impact while also reaping financial rewards. They can lead to potential income tax deductions and be a part of a strategic plan for estate gifts, reducing the taxable estate.

For scholarship recipients, an endowed scholarship represents a reliable source of tuition assistance, often making the difference in their ability to pursue higher education. These scholarships can be designated according to the donor’s wishes, targeting specific fields of study, financial need, or other criteria, thus allowing donors to support areas they are passionate about. One of the most important aspects of establishing an endowed scholarship is setting the criteria for scholarship recipients. This process allows donors to personalize their scholarship according to their values and the impact they wish to make. Criteria can include academic merit, financial need, specific areas of study, or any other factors the donor deems important.

Balancing the donor’s wishes with institutional policies is key. While the donor can designate the scholarship according to their preferences, they must also ensure that the criteria are feasible and aligned with the institution’s policies and regulations. Naming a scholarship can be a very meaningful way to honor family, friends, or personal causes. It ensures that the donor’s or the loved one’s name is associated with educational support and philanthropy for years to come.

Effective management of the endowment is crucial to ensure its longevity and impact. This involves prudent investment strategies to grow the principal amount, while generating sufficient income to support the scholarship. Regular reviews and adjustments to the investment strategy are necessary to align with market conditions and the scholarship’s objectives.

Donors and institutions may also seek additional contributions to the scholarship fund. These contributions may be made by the donor, family members, or others who share the donor’s vision, thus helping to grow the fund and increase its impact over time.

Incorporating endowed scholarships into an estate plan can have significant tax implications. Donors can benefit from income tax deductions for their contributions to the scholarship fund. By reducing the taxable estate, endowed scholarships can also be an effective tool in estate planning, potentially lowering estate taxes.

Endowed scholarships are more than just financial aid; they offer a unique opportunity to create an important legacy of support, ensuring that the donor’s passion for education and charitable giving continues to make a difference for many years. If you would like to read more about endowed scholarships, and other forms of charitable giving, please visit our previous posts.

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529 Plans allow Grandparents to help with the Cost of College

January 25, 2024

529 plans allow grandparents to help with the cost of college for grandchildren. Helping grandchildren prepare for long-term success and easing the financial burden of college costs is a gift for two generations, as mentioned in a recent article from Kiplinger, titled “529 Plans: Give the Gift of Education (and Compounding).”

Giving cash directly to children or parents isn’t the best long-term strategy. Once the money is given, control is surrendered, and the gift may not be used as intended by the giver. Saving for college is one of the significant financial challenges parents face, especially considering the high inflation of college tuition costs. Between 2021 and 2022, U.S. college tuition rates increased by 12%.

This is where estate planning intersects with the new year. As the current historically high estate tax exemption ends at the end of 2025, managing the size of one’s estate becomes a higher priority. The structure of 529 college savings accounts can be used for tax efficiency and to control the eventual use of the gift while taking advantage of long-term compounding.

Current gift tax rules allow individuals to gift up to $18,000 per year per person. Therefore, a married couple could gift $36,000 to each child and grandchild without it counting against their lifetime exemption or requiring them to file a gift tax return. However, the 529 is even more advantageous, allowing a five-year front-loading of such gifts per recipient.

If your state has a plan, funding 529 plans offers deductions on state income taxes. If your state doesn’t have a 529 plan, you can open an account in another state but won’t receive the tax deduction.

There have always been concerns about overfunding a 529 account or having unused funds if the beneficiary decides not to attend college. Most plans allow account owners to change beneficiaries without any tax consequences as long as the new beneficiary is a member of the current beneficiary’s family. If the new beneficiary is younger than the prior one, it may be wise to change the asset allocation to reflect the new time horizon.

Another common question regards the impact gifting may have on the student’s application for federal aid. While 529 plans owned by parents are considered, 529 plans owned by grandparents are not on the FAFSA (Free Application for Federal Student Aid) form.

Changes to the original 529 structure have rendered these accounts even more valuable. The Tax Cuts and Jobs Act expanded the eligibility of 529 accounts for private and parochial K-12 schools. Then, the SECURE Act allowed 529 funds to be used to pay down up to $10,000 in student debt.

Starting in 2024, the SECURE 2.0 Act allows 529 funds to be rolled over into a Roth IRA at the annual contribution limit up to a lifetime maximum of $35,000 for a beneficiary. The account needs to be open for at least 15 years. Still, having an account grow in a tax-free environment and removing the distribution restrictions presents a valuable new investment tool.

Speak with your estate planning attorney about how 529 plans can allow grandparents to help family members with the cost of college and plan for estate taxes. If you would like to learn more about gifting and 529 plans, please visit our previous posts.

Reference: Kiplinger (Dec. 20, 2023) “529 Plans: Give the Gift of Education (and Compounding)”

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Qualified Charitable Distributions benefit older Taxpayers

December 19, 2023

Qualified charitable distributions use the federal tax code to benefit older taxpayers and must take Required Minimum Distributions (RMDs). Recent changes in federal law under the SECURE Act 2.0 present even more opportunities to use QCDs, according to a recent article, “Planning Ahead: Expanding on year-end tax strategies for Qualified Charitable Distributions,” from The Mercury. How does it work?

Required Minimum Distributions for seniors can become a problem since taxpayers above a given age must withdraw specific amounts based on their age from traditional retirement accounts and pay taxes on the withdrawals, regardless of whether they need the money. The reason is obvious: if people weren’t required to take funds out of their accounts, the government would never have the opportunity to generate tax revenue. The QCD lessens the blow of the additional year-end taxes by providing some relief through donations to qualified charities.

Used correctly, the QCD serves two purposes: saving on taxes and benefiting a favorite charity. Charities include any 501(c)(3) entities under the federal tax code. Before using a QCD, ensure the charity you choose is a qualified 501(c)(3). Otherwise, you’ll lose any tax benefits.

Your estate planning attorney can help you understand the process of making a QCD. You’ll need to coordinate with the custodian of the IRA. While some may provide step-by-step information, others require you to coordinate with your estate planning attorney and financial advisor. A reminder—the point of the QCD is that the distribution does not appear in your adjusted gross income and goes directly to the charity.

Usually, taking RMDs adds funds to your taxable income, which can, unfortunately, push you into a higher income tax bracket. It could also limit or eliminate some tax deductions, such as personal exemptions and itemized deductions. There may be increases in taxes on Social Security benefits as well. Whether you want or need to take the RMD, you must take it and include it as taxable income.

Qualified charitable distributions benefit older taxpayers by allowing individuals required to take RMDs to donate up to $100,000 to one or more qualified charities directly from a taxable IRA, without the funds being counted as income.

The RMD age has increased to 73, but the $100,000 will be indexed for inflation. Under SECURE Act 2.0, individuals will be allowed to make a one-time election of up to $50,000 inflation-indexed for QCDs to certain entities, including Charitable Remainder Annuity Trusts, Charitable Remainder Unitrusts and Charitable Gift Annuities.

QCDs cannot be made to donor-advised funds, private foundations and supporting organizations, even though these are often categorized as charities.

It must be noted that the rules concerning QCD are detailed and strict—you’ll want the help of an experienced estate planning attorney.

The QCD must be made by December 31 of the tax year in question. If you would like to learn more about charitable planning, please visit our previous posts.

Reference: The Mercury (Nov. 22, 2023) “Planning Ahead: Expanding on year-end tax strategies for Qualified Charitable Distributions”

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Gift and Estate Tax Exemption Limits Increase for 2024

December 11, 2023

The year 2024 will bring more reasons to be generous, since the Internal Revenue Service (IRS) has increased the limits for gift and estate tax exemption amounts to their highest amounts ever. It’s good news to start the year with, reports the article “IRS Increases Gift and Estate Tax Exempt Limits—Here’s How Much You Can Give Without Paying” from yahoo! finance.

Those with large estates should always consider gifting during their lifetime to reduce taxes by using the annual gift and lifetime gift and estate tax exemptions. Right now, you may give an unlimited number of people up to $17,000 each in a single year without taxes. However, in 2024, this increases to $18,000 per person. For married couples starting in 2024, a gift of $36,000 can be made to any number of people, tax-free.

More good news: the IRS announced that the lifetime estate and gift tax exemption will increase to $13.61 million in 2024. A gift exceeding the annual limits won’t automatically prompt a gift tax. The difference is taken from the person’s lifetime exemption limit, and no taxes are owed. Your estate planning attorney will create a long-term strategy to use these exemptions to manage your estate tax liabilities.

Let’s say you were feeling generous and bought a friend a car for $20,000 in 2023. You would have exceeded the annual limit of $17,000 but wouldn’t owe any additional taxes. You’d use IRS Form 709 to report the gift and deduct $3,000 from your lifetime exemption of $12.92 million for this year. If you instead make the gift in 2024, you’d subtract $2,000 from your $13.61 million limit.

Gifts between American spouses are virtually unlimited. Couples have $24.84 million in estate tax exemptions, and going over this limit is only taxed upon the surviving spouse’s death.

However, a gift to a non-U.S. citizen, regardless of whether or not they are a U.S. resident, falls under different rules and is subject to an annual tax exclusion amount. The annual amount one may give to a spouse who is not a U.S. citizen increases to $185,000 in 2024 from $175,000 in 2023.

Something else to keep in mind—unless Congress acts, the lifetime estate and gift tax exemption is due to return to the pre-2017 Tax Cuts and Jobs Act level of $5.49 million on December 31, 2025. Your wisest move is to speak with your estate planning attorney about a strategic plan for gift-giving and planning to minimize estate tax liability before the change occurs. To take advantage of the gift and estate tax exemption limits increase for 2024, consult with you estate planning attorney. He or she will make sure you are reaping the benefits. If you would like to learn more about the gift tax, please visit our previous posts.

Reference: yahoo! finance (Nov. 14, 2023) “IRS Increases Gift and Estate Tax Exempt Limits—Here’s How Much You Can Give Without Paying”

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Strategies to minimize Taxes on Trusts

October 25, 2023

Dealing with trusts and the tax implications for those who create them, and their beneficiaries can seem confusing. Nevertheless, with the help of an experienced estate planning attorney, those issues can be managed, according to a recent article, “5 Taxes You Might Owe If You Have a Trust,” from Yahoo! Finance. There are strategies to minimize taxes on trusts.

Trusts are legal entities used for various estate planning and financial purposes. There are three key roles: the grantor, or the person establishing the trust; the trustee, who manages the trust assets; and the beneficiary, the person or persons who receive assets from the trust.

Trusts work by transferring ownership of assets from the grantor to the trust. By separating the legal ownership, specific instructions in the trust documents can be created regarding using and distributing the assets. The trustee’s job is to manage and administer the trust according to the grantor’s wishes, as written in the trust document.

Trusts offer control, privacy, and tax benefits, so they are widely used in estate planning.

There are two primary types of trusts: revocable and irrevocable. Revocable trusts are adjustable trusts that allow the grantor to make changes or even cancel during their lifetime. They avoid the probate process, which can be time-consuming and expensive, especially if assets are owned in different states. However, the revocable trust doesn’t offer as many tax benefits as the irrevocable trust.

Think of irrevocable trusts as a “locked box.” Once assets are placed in the trust, the trust can’t be changed or ended without the beneficiary’s consent. In some states, irrevocable trusts can be “decanted” or moved into another irrevocable trust, requiring the help of an experienced estate planning attorney. However, irrevocable trusts are not treated as part of the grantor’s taxable estate, making them an ideal strategy for reducing tax liabilities and shielding assets from creditors.

Trust distributions are the assets or income passed from the trust to beneficiaries. They can be in the form of cash, stocks, real estate, or other assets. For instance, if a trust owns a rental property, the monthly rental property generated by the property could be distributed to the trust’s beneficiaries.

Do beneficiaries pay taxes on distributions from the principal of the trust? Not generally. If you receive a distribution from the trust principal, it is not usually considered taxable. However, the trust itself may owe taxes on any income it generates, including interest, dividends, or rental income. The trust typically pays these before distributions are made to beneficiaries.

It gets a little complicated when beneficiaries receive distributions of trust income. In many cases, the income is taxable to the beneficiaries at their own individual tax rates. This can create a sizable tax wallop if you are in your peak earnings years.

There are strategies to minimize taxes on your trust. One approach is to structure trust distribution with a Charitable Remainder Trust, where income goes to a charity for a set number of years, and the remaining assets are then distributed to beneficiaries. An estate planning attorney will be a valuable resource, so grantors can achieve their goals and beneficiaries aren’t subject to overly burdensome taxes. If you would like to learn more about tax planning, please visit our previous posts.

Reference: Yahoo! Finance (Sep. 27, 2023) “5 Taxes You Might Owe If You Have a Trust”

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Category: Gift Tax

Do You Pay Taxes on Wedding Gifts?

The Estate of The Union Season 3|Episode 3 is out now!

When Gift Tax Return Should Be Filed

Crummey Trusts are an Option to Gift to Minors

Pitfalls of Adding a Child to Your Home’s Deed

Endowed Scholarships create an Important Legacy

529 Plans allow Grandparents to help with the Cost of College

Qualified Charitable Distributions benefit older Taxpayers

Gift and Estate Tax Exemption Limits Increase for 2024

Strategies to minimize Taxes on Trusts

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