Recent tax increases have effected a vehicle that many Florida residents use as part of a comprehensive estate plan. The marginal 39.6 percent rate included in the 2012 tax legislation that is imposed on an individual's income in excess of $400,000 is applied to trusts at the $11,950 threshold. Furthermore, the new 3.8 percent Medicare surtax directed at net investment income of individuals earning more than $200,000 is applied to trusts at the same $11,950 level.
The result is that a trust with taxable income in 2013 of $100,000 is paying close to $7,400 more in taxes than it would have in 2012. This has estate planners determining alternative ways to maximize distributions to trust beneficiaries.
One suggestions is to invest more of the trust assets in tax-free vehicles such as municipal bonds. Another alternative is to distribute more of the income from the trust to beneficiaries who are in lower tax brackets than the trust itself. However, increased distributions may not be an option allowed by the trust or be feasible if the beneficiaries are too young to handle the additional cash flow. Regardless, it should be noted that tax benefits are often only a secondary incentive to establishing a trust, and the other benefits of a trust should not be overlooked.
With tax rules and regulations subject to change and the circumstances of each person's life evolving continuously with family marriages, deaths and births, input from an estate planning attorney when making distribution decisions and drawing up the appropriate paperwork is invaluable. The attorney may be able to help to ensure that the various documents included in an individual's estate plan accomplish what the owner desires.
Source: CNBC, "Estate planners shift gears in new tax environment", Andrew Osterland, March 21, 2014