Lake County Estate Tax Attorney
Trust Income Taxes
A trust is an entity controlled by a trustee that owns assets for the benefit of others, known as beneficiaries. The beneficiaries of the trust are those specified in the document. They may be family or friends or charities. The trustee, who may be an individual or a bank, carries out the terms of the trust and oversees its operations in a fiduciary capacity, which means that the trustee acts in good faith without self-dealing.
Trust income is always paid either to the beneficiary or accumulated within the trust itself. The grantor is the person who puts assets into the trust. The grantor and beneficiary can also be the same person.
Revocable living trusts created for estate planning to avoid probate are always grantor trusts. The tax identification number of that type of a grantor trust is usually the grantor's own social security number. If that is the case, all income is reported on the grantor/beneficiary's Form 1040. There are also various types of grantor trusts that use a different tax identification number from the grantor's social security number. Regardless of its type, If income is retained in the trust or otherwise not reported on the grantor/beneficiary's Form 1040, then the trust must file a Form 1041, possibly paying a higher tax rate on the income than would be assessed upon the individual's Form 1040 return.
If the grantor is not the beneficiary, then the trust may be simple or complex. A simple trust mandates payment of all income earned by the trust, at least yearly, to defined beneficiaries. A complex trust does not mandate payment of income and may allow for payments to non-beneficiaries, such as charities. A trust's status as simple or complex can change yearly, depending on the actual facts, such as whether the trust generated any earnings.
Whether simple or complex, the income paid to a beneficiary is taxed to such beneficiary at his/her tax bracket. Taxes related to income retained by a complex trust is paid by the trust. When a trust retains income, it pays taxes at a steeper bracket than individuals. That federal bracket is 39.6% once $7,500 is retained by the trust entity. Complex trusts, whether the trust income is entirely paid to the beneficiary or not, must file a Form 1041 for any year where income exceeds $600.
Trusts are often used to mitigate estate taxes, via shelter provisions and generation skipping. Also, irrevocable trusts can be created for estate tax reasons. Also see Estate Tax Basics for a general overview.
If you live in the Chicago or Lake County area, and need an experienced estate tax attorney, please contact Matlin and Associates.
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- Probate & Trust Administration