Minimizing taxes on trusts

If you have established or plan to establish one or more trusts as part of your estate plan, be sure to evaluate the tax implications. Trusts have grown in popularity, but many people do not understand that there are various types of trusts which each have their own set of rules. Trusts can hold real estate, but you should take a step back and consider if that is the best option.

For 2019, trusts enter the highest tax bracket (37%) when their income tops $12,750, so it is important to consider steps to reduce the tax bite. Married taxpayers filing jointly in 2019 hit the top bracket of 37% when income is greater than $612,350.

Potential strategies include the following:

  • Use grantor trusts. These trusts are designed so that the trust's income is taxed to the grantor, not the trust.
  • Avoid taxable investments. Shifting the trust's investments to tax-exempt or tax-deferred investments, such as municipal bonds or life insurance, can reduce the burden of high income taxes. Be wary; state taxes may still apply.
  • Distribute income. Generally, non-grantor trusts are taxed only on undistributed taxable income which can be avoided if the trust distributes income to its beneficiaries.

Keep in mind that shifting income to the grantor or beneficiaries is effective only if they are in a lower tax bracket than the trust.

Donating stock to charity

If you are charitably inclined, consider donating appreciated stock, instead of cash, to charity. So long as you have held the stock for more than a year and itemize deductions on your tax return, you will be entitled to deduct the stock's fair market value (up to 30% of your adjusted gross income). Plus, you will avoid capital gains taxes that you would have paid had you sold the stock and donated the cash. The charity, as a tax-exempt entity, can sell the stock tax-free.

Reinvesting capital gains in Qualified Opportunity Zones

The 2017 Tax Cuts and Jobs Act has created a new tax savings vehicle that helps promote economic development and job creation in distressed areas across the United States by reinvesting your capital gains into a qualified opportunity fund (QOF). Your gain will be deferred and if you hold onto the investment long enough (five, seven or ten years), you can reduce or exclude the gain completely. Similar to a like-kind exchange, there are strict rules the taxpayer must adhere to in order to qualify for this tax incentive. Please contact your tax advisor to learn about all the rules before investing in a qualified opportunity fund.

Related Read: "Using Cost Segregation for Like-Kind Exchanges"

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.