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 its 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 taxes at his or her rates. 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, in Massachusetts, if you die with assets over $1M in Massachusetts, then your Estate will be subject to tax. You are not just taxes on what is over and above the $1M, but on the entire amount. So, if you die with $1,000,001.00 in your name, your estate will pay a tax. This includes real estate values, life insurance, retirement plans, bank accounts, and so on. With a Trust, if you are married, you can reduce or eliminate that Massachusetts estate tax entirely with the creation of a credit shelter trust. This could amount to savings of hundreds of thousands of dollars!

By way of comparison, the Federal Estate exemption amount today is $11.58M. That means if you die with $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. Again, you can mitigate 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. Important to note that the Federal Estate Tax is a POLITICAL number. It is always changing. $11.58M is Trump’s number; Obama’s number was $5.2M. In 2006, the exemption amount was as little as $2M. Why is that important? No one has the crystal ball to know what the estate tax exemption will be at the time of your death. This is why creating flexibility in your plan is so important.

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 20West Legal, LLC 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 Family Wealth 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 Family Wealth Planning Session and mention this article to find out how to get this $750 session at no charge.

How Do Trusts Help You Save on Taxes?