How Has the Fiscal Cliff Deal Impacted Trusts?

Inez Bowie | July 8th, 2013

If you deal with trusts, you may soon feel the effects of new higher tax rates and the Medicare surtax. Unfortunately, the fiscal cliff deal was not kind to trusts, trustees or trust beneficiaries. For 2013, a trust will pay income tax at the highest individual tax rate of 39.6 percent when taxable income is more than $11,950. An individual would not pay at this highest tax rate until taxable income exceeds $400,000. In addition, the new 3.8 percent Medicare surtax on net investment income applies to trusts if taxable income exceeds $11,950. 
The difference in the tax brackets between trusts and individual beneficiaries presents an opportunity for the trustee to manage the trust’s taxable income and discretionary distributions. The income tax considerations may be rather interesting. 

Let’s Break It Down

The Doe Family Trust established for the benefit of Mr. Doe’s son, John, had $100,000 of interest income during the 2013 tax year. The expenses for the same year were $20,000. The trustee has the discretion to make a distribution to John Doe or to accumulate the income in the trust. The trustee is considering a distribution of accounting income to John, who is currently in the 28 percent tax bracket. From a tax standpoint, does it make sense to make the distribution?

If the trustee does not distribute any income to John, the trust would owe tax in the neighborhood of $32,580. If the trust distributes $80,000 to John, the tax consequence to John would be roughly $22,400. The tax savings alone would be $10,180.

Need Help With Your Trust?

There are many factors to consider when dealing with trust management, and tax considerations is just one of them. It is important for the trustee and the trust beneficiary to understand the tax consequences in order to make informed decisions. If you’re looking for help with your trust, contact Rea & Associates. Our Ohio tax planning professionals can help guide you as you strive to make informed decisions about the future of your trust.


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