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You Know About the Changes to Personal Income Tax, but Have You Considered New Tax Consequences for Trusts and Estates?

Most taxpayers are aware of the tax law changes, which include an increase in the top income tax rate and capital gains rate as well as a 3.8% Medicare surtax.  While much of the focus has been on the personal income tax side, these changes also apply to non-grantor trusts and estates with potentially far greater tax consequences.

First, let’s review the tax rate changes.  For individual tax payers with income starting at $400,000 the new top tax rate on ordinary income is 39.6% and 20% on long-term capital gains and dividend income.  In addition, there’s also a 3.8% Medicare surtax applied on the lesser of: 1) Net investment income (NII), or 2) the excess of modified adjusted gross income (MAGI) over $200,000.  Conversely, for trusts and estates the top rate of 39.6% and 3.8% surtax apply on the lesser of 1) undistributed NII, or 2) the excess of adjusted gross income over about $12,000.  Given this low income threshold, the surtax could apply more easily for trusts and estates.  Thus, it may make sense to look at strategies that can help in minimizing the net investment income inside a trust.

So, what are our planning opportunities? Given the low income threshold for trusts and estates, one planning consideration is to distribute out as much of the NII to beneficiaries.  In general, trusts and estates are subject to a set of income rules whereby any income earned in the trust but distributed out to beneficiaries is then taxed to the beneficiaries at their income tax rates.  Any income retained by the trust is then taxed to the trust.  Depending on the beneficiaries’ tax picture and given their higher income thresholds, it may make sense to distribute out income from the trust to minimize the trust’s taxable income while maximizing the beneficiaries’ cash flow without adversely affecting their tax picture.  Not only would this help to reduce the tax liability to the trust, it may also benefit income beneficiaries who may need the income.  Of course, such distributions should be consistent with the trust provisions and the trustee’s fiduciary duties.

As always, we recommend that you work with your Wealth Advisor and other tax and legal counsel to determine how any changes would affect your tax picture.

 

 

Important Disclosure Information

Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request. This article is not a substitute for personalized advice from RegentAtlantic.  This information is current only as of the date on which it was sent.  The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic.

Important disclosure information

Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable.

Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.

This article is not a substitute for personalized advice from RegentAtlantic. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.

RegentAtlantic does not provide legal or tax advice. Please consult with a legal and or tax professional of your choosing prior to implementing any of the strategies discussed in this article.

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