General Issues
 

Filing Requirements
Trusts and estates must file an income tax return (Form 1041) for each taxable year if the trust has earned $600 in income, or has a beneficiary that is a non-resident alien.

For a grantor trust, assuming the individual grantor has reported all items of income and expenses on their own individual income tax return (Form 1040), are not required to file a 1041. This makes the grantor liable for the total taxes under their return.

Deadlines
Estate income tax returns and Trust income tax returns (Form 1041) share the same filing deadline as regular taxpayers of April 15th of the year following the actual tax year (adjusted later for holidays and weekends). Extensions of time can be granted for five months if the administrator files for an automatic extension request (Form 7004).

Choice of Taxable Year
Certain trusts (complex trusts) allow flexibility to the beneficiaries to receive or defer the trust income and principal for the given tax year depending on their personal preference for the year.

Reasons for doing this might include a charitable contribution from the trust utilizing the gross accounting income, bad year in the market or possibly the beneficiary has a substantially high tax rate on their individual return due to earned income and the trust would receive a more favorable tax rate. Whatever the reason and if the trust allows, the trustee can chose to pay income or allow the income to accumulate within the trust and have the trust pay the tax due.

Tax Treatment of Distributions to Beneficiaries
Trust or estate income is taxed to the beneficiary as if they had received the income directly from the original source and not the trust itself. To clarify, an ordinary income would be fully taxable, tax-exempt interest remains tax-free and capital gains are still treated as capital gains.

How Beneficiaries Report Income:

  1. Dividends and Interest - Schedule B of Form 1040
  2. Capital Gains - Schedule D of Form 1040
  3. Real estate or business activities - shown on Schedule K-1 and reported on Schedule E (subject to passive activity restrictions)

Rate Structure
It's important to know about two separate potential tax issues when it comes to trust and estate planning and taxation. There's the federal "Income Tax Return for Trusts and Estates" (Form 1041) and also the "Estate Tax Return" (Form 706).

Trust Income Tax Rates for 2013:

If taxable income is: The tax is:  
Not over $2,450 15% of the taxable income
Over $2,450 but not over $5,700 $367.50 plus 25% of the excess over $2,450
Over $5,700 but not over $8,750 $1,180 plus 28% of the excess over $5,700
Over $8,750 but not over $11,950 $2,034 plus 33% of the excess over $8,750
Over $11,950 $3,090 plus 39.6% of the excess over $11,950

 

The rates in this tax table represent a substantial increase in the tax rate for trusts as a result of the American Taxpayer Relief Act, which has also raised the top capital gains rate for trusts to 20%. The 3.8% Obamacare tax also applies to all investment income that stays within a trust and is not distributed to beneficiaries. This change in the tax law will therefore have a major impact on estate planning strategies for both the wealthy and the middle class.

 

Estate Taxes
Estate tax computed on Form 706 is eliminated or reduced by the "unified credit," which applies to both the gift tax and the estate tax. Each taxpayer is given an exclusion amount that is exempt from federal estate tax. For 2013, that amount is $5.25 million. Estates over that amount would pay a maximum estate tax rate of 40%.  

 



Grantor / Non-Grantor Trusts

Related Articles
  1. Managing Wealth

    Pick The Perfect Trust

    Trusts are an estate plan's anchor, but the terminology can be confusing. We cut through the clutter.
  2. Taxes

    Tax-Efficient Wealth Transfer

    Taxpayers with large taxable estates were required to take steps to reduce them before 2011.
  3. Financial Advisor

    Should You Put Your Faith In A Trust?

    Many institutions want a piece of your portfolio, but trusts can provide a one-stop shop.
  4. Financial Advisor

    Irrevocable Trusts: New Trends You Need to Know

    Several improvements and additional provisions have been added to irrevocable trusts in recent years making them considerably more versatile than before.
  5. Retirement

    How To Set Up A Trust Fund In Australia

    No, they're not just for the super-rich. But you need to know the rules.
  6. Financial Advisor

    Advisors: Tips for When to Employ Living Trusts

    Revocable living trusts accomplish estate planning objectives that aren't possible with a will. Here are some of the cases that show when to use a trust.
  7. Retirement

    How To Set Up A Trust Fund In The U.K.

    A guide to the whys and wherefores of setting up this most versatile of estate-planning instruments in the United Kingdom.
  8. Managing Wealth

    Surprising Ways a Trust Could Help Your Family

    Everything you always wanted to know about setting up trusts, in handy glossary form.
  9. Managing Wealth

    How ING Trusts Have Surprising Tax Advantages

    Learn how ING trusts can be used to shield assets from state income taxes and provide additional protection for high-wealth individuals.
  10. Managing Wealth

    The Only 3 Reasons to Have an Irrevocable Trust

    Only put your assets in an irrevocable trust for one of these three reasons.
Frequently Asked Questions
  1. How does the number of credit card accounts I have affect my credit score?

    Your credit score, which is also referred to as your FICO score, is a measure that creditors use to assess your potential ...
  2. What is the 'three-legged stool'?

    The "three-legged stool" was a retirement terminology from the past that many financial planners used to describe the three ...
  3. If I am looking to get an investment banking job, what education do employers prefer? MBA or CFA?

    If you are looking specifically for an investment banking position, an MBA may be marginally preferable over the CFA. The ...
  4. Is a Simplified Employee Pension (SEP) IRA tax deductible?

    Learn everything you need to know about your SEP IRA, including the benefits to employers and whether or not a SEP IRA is ...
Trading Center