Administering a trust is often a difficult and complex job. How a trustee invests and disburses trust assets can have important tax implications. That is why it is critical to work with an estate and probate lawyer when drafting a trust agreement, and with other professionals, including accountants and tax attorneys, when administering a trust.
In today’s post we will take a brief look at the issue of accumulating trust income. Because state laws governing trusts vary and this is a complex issue, please consult an experienced estate and probate lawyer near you for more information.
Income Accumulation, Trusts, and Trustee Discretion
One major advantage of creating a trust is that it can be tailored to the individual needs of the grantor (or “settlor”). This is one of the features that makes trusts extremely flexible estate planning tools.
It also means that every trust, despite having some general common clauses or provisions, is unique.
The primary authority that determines how the trust will be administered is the trust document. The trust document gives the trustee specific powers and details how the trustee is to manage the trust.
A trust that allows accumulation of income allows the trustee to gather (i.e., accumulate) the income generated by the trust (such as rents, dividends, interest, etc.). When income is accumulated, it is added to the principal (or “corpus”) of the trust.
Some trust documents specify what must happen to the income —whether it can be accumulated until a specific time identified in the trust document, or whether it must be distributed.
Other trust documents give the trustee discretion to decide whether to accumulate the income or disburse it. Such disbursements are referred to as “discretionary income distributions.”
Trusts and Taxes.
Trust management has tax implications that must be considered.
Generally speaking, if a trust allows for the accumulation of income and it is not distributed, the trust pays tax on the income.
On the other hand, if a trust allows for distribution of income and the trust distributes to the beneficiaries, then the trust can deduct the amount of the distribution, and the beneficiaries must include it as income on their taxes.
The question of whether a trustee given discretion to distribute should accumulate income is an important one because trusts hit the highest tax bracket— 37%— when the net income hits a mere $13,050!
Contrast this to the fact that individuals only hit the 37% bracket when their net income is $523,601 (for single filers) or $628,301 (for married filing joint filers).
Given this, it is rarely desirable to accumulate income in a trust UNLESS there is a good reason for doing so. For example, if there is a beneficiary with substance abuse problems or financial problems, or a beneficiary with special needs, etc.
And it is generally a good idea when drafting trust agreements, to allow the trustee some flexibility, so that the trustee is not forced to either accumulate or distribute income.
Finally, every trustee should always seek experienced legal and professional tax advice to greatly reduce their chances of being sued.
Protecting Your Family is Just a Phone Call Away.
Don’t leave planning for your future and that of your loved ones to chance. All it takes is one phone call to the Law Offices of Samantha J. Fitzgerald to ensure that your wishes will be followed, and your loved ones taken care of when you are gone. We expertly guide individuals through the complex probate process, and capably handle all aspects of the creation, administration, and settlement of trusts as well. When you work with the estate planning attorneys at the Law Offices of Samantha J. Fitzgerald, you get more than just an estate plan: you get peace of mind. Call us at 954-580-3690 or email us at: [email protected] today.