As you consider the benefits of creating a family trust, at some point you will want to focus on the tax implications.
Did you know that trust assets are not taxed unless they earn income? Did you know that trust income is typically taxed in the same manner as personal income? Although this may be true, there are often tax advantages of implementing a family trust.
The tax benefits and drawbacks of a family trust is based on the type: revocable or irrevocable. While you have the right to dissolve or make changes to a revocable trust at any time, you will require a court order or permission from all beneficiaries to do the same to an irrevocable trust.
Assets that make up an irrevocable trust, unlike those in a revocable trust, are not counted as part of your estate when it comes to estate tax. For this reason, it is important to consider an irrevocable trust, as it could help save a lot of money on estate tax.
Federal Income Tax
During your lifetime, you will not be taxed on trust assets. That being said, any income derived from such assets is taxed at your ordinary rate. For example, real estate may produce rental income or you may have bank accounts that earn interest.
With a revocable trust, the IRS considers all income your income, which means you will be taxed accordingly.
With an irrevocable trust, since the assets are not yours, the trustee is required to file a tax return on behalf of the trust.
Since laws differ from one state to the next, the tax benefits of a family trust will also vary. If you are interested in creating a family trust, have questions about the tax benefits, or are wondering if this is the right choice, contact us to discuss your situation and many options.