Year-End Trust Planning

Hoffman17Year-end tax planning for individuals, trusts and businesses provides not only the opportunity to review the activities of the past year, it also generates an invaluable opportunity to leverage tax planning techniques as they relate to new developments.  Many of the tax planning strategies for individual taxpayers are also applicable to trusts.  As with individuals, spreading the recognition of income between tax years may minimize trust taxes. Another tax minimization strategy for a trust is to shift trust income from a high rate trust to a lower rate beneficiary.  We are ready to help you plan efficiently and effectively for 2015 and future years.

Income and Capital Gains/ Dividends: The tax brackets for trusts are  more compressed than the tax brackets for individuals.  For example, in 2015, the 39.6% tax bracket for individuals filing jointly begins at $464,850 of taxable income, but for trusts the 39.6% bracket begins at only $12,300 of taxable income.  As a result, shifting trust income to the beneficiary may produce significant tax savings.  One way this can be achieved is by makingdistributions from the trust to the beneficiary.

Net Investment Income Tax: While the 3.8% NII tax threshold for individuals is $250,000 for married filing joint and $200,000 for individuals filing single, the 2015 NII tax threshold for trusts begins at only $12,300 of taxable income.  This can result in a substantial amount of trust income being subject to the additional 3.8% NII tax.  However, trust exposure to the NII tax may be reduced through distribution planning (See the following paragraph).

Beneficiary Distributions & The 65 Day Rule: When distributions are made from the trust to the beneficiary, the trust is allowed a deduction for the distribution of certain classes of income.  The income is then included on the beneficiary’s individual income tax return.  In many cases, the beneficiary’s individual income tax rate is lower than the income tax rate for the trust.  This results in less total income tax on the trust income.

A trust can elect to treat distributions made in the first 65 days of the tax year as a distribution of current year or prior year income.  Therefore, a distribution made byMarch 5, 2016, can be treated as a distribution of 2015 trust income.  This allows some additional time to determine the income for the trust and determine if a distribution should be made to the beneficiary.

The decision on whether to make a distribution, and the amount of the distribution, should be reviewed each year.  The tax related factors can change from year to year and there are also other non-tax factors that should be considered.

For more information regarding this or any other tax planning concern, please visit the Hoffman & Associates website at www.hoffmanestatelaw.com, call us at 404-255-7400 or send us an email.