Mastering the Complexities of Simple and Complex Trusts
Exploring the Types of Trusts
There exists a multitude of trust types, including simple trusts, complex trusts, grantor trusts, among others. This article will primarily focus on simple and complex trusts, while also offering a brief overview of other trust types.
Unraveling the Complexities of Simple and Complex Trusts
Diving into the convoluted world of trusts, simple trusts and complex trusts are two common categories. Simple trusts are mandated to distribute all income generated by the trust annually, while complex trusts enjoy more flexibility in income and principal retention or distribution. The principal constitutes the assets held within the trust, whereas income denotes the revenue derived from these principal assets.
Deciphering Trust Taxation
In a simple trust, beneficiaries bear the tax liability on their share of the trust's income. The trust itself typically doesn't incur tax liability. In contrast, a complex trust may pay taxes on income retained within the trust, with beneficiaries paying taxes on the income they receive.
The fundamental rule is that beneficiaries pay taxes on distributions of trust-generated income, while the trust pays taxes on trust-generated income that remains undistributed to beneficiaries by the end of the year.
Read more: How to Minimize Inheritance, Estate & Capital Gains Taxes
Navigating Tax Implications and Tax Forms
For complex trusts, the trust files IRS Form 1041. Beneficiaries receive a Schedule K-1 to report their share of the distributed income on their personal tax returns.
Federally, trust income is taxed differently than individual income. In 2023, the highest federal tax rate for trusts is 37% on income exceeding $13,450. For California, the tax rate at the same income level is approximately 9.3%. Notably, these rates are subject to change.
Considering Retirement Accounts
Questions often arise concerning the taxability of assets such as IRAs in a trust. Some assets can trigger a taxable event. A future article will delve deeper into this topic.
In summary, regardless of whether a trust is simple, complex, or somewhere in between, the government always ensures to collect its share of taxes.
Read more: Estate Planning Rundown for 2023: The Numbers You Need to Know
BETHEL LAW CORPORATION
ESTATE PLANNING | ELDER LAW | BUSINESS PLANNING
CLICK HERE OR CALL US AT 909-307-6282 TO SCHEDULE A FREE CONSULTATION.
