Are you considering creating a trust for your estate? It’s a smart move for various legal reasons – from avoiding the probate process to ensuring your assets are distributed according to your wishes. However, there’s one thing you shouldn’t overlook: taxes.
In this blog, we’ll simplify the complicated world of trust taxes and share suggestions to get through tax liabilities. We’ll cover strategies that can save you a significant amount of taxes – from distributing trust income to making the most of your annual gift exclusion. We’ll also introduce the concept of an intentionally defective grantor trust (IDGT) and its trade-offs.
Whether you’re setting up a trust or managing an existing one, having these tax strategies in mind can make a difference in your financial future.
Distribute trust income to beneficiaries.
Consider giving the income from your trust to the people it’s intended for. In 2023, for a single person to face the highest tax rate of 37%, they need to earn at least $578,125 ($693,750 if married). However, with certain trusts, that 37% tax rate kicks in at just $14,450. This means you can save on taxes by distributing income from those trusts to beneficiaries who may be in lower tax brackets. It’s a clever way to reduce your tax bill
Use your annual gift exclusion.
You’re allowed to give up to a certain amount of money (in 2023, it’s $17,000) to anyone or a trust without anyone involved paying income taxes on it. However, it’s important to remember that you can’t save this exclusion for later – it’s a ‘use it or lose it’ deal. Also, keep in mind that there’s an unlimited gift exclusion for most medical and educational expenses paid directly to the provider.
Set up an intentionally defective grantor trust (IDGT).
A regular trust faces a 37% tax rate at just $14,450 of income. In contrast, an Intentionally Defective Grantor Trust (IDGT) only reaches the 37% rate when it accumulates $578,125 (if single) or $693,750 (if married). The key difference with an IDGT is that it’s unchangeable – once you move an asset into it, you usually can’t take it back. This means you can potentially reduce your tax bill significantly with an IDGT, but you’ll have to give up control of the assets inside it.
These tips are just the tip of the iceberg when it comes to trimming your trust and estate’s tax bill.
If you have questions about setting up a trust or need guidance with an existing one, we’re here to help. Contact us and let our expert team at Masler & Associates Inc. handle your tax situation — especially if it’s more complex. Let’s help you keep more of what you make!