The long-favored grantor-retained annuity trusts (GRATs) can confer big tax savings during recessions. These trusts pay a fixed annuity during the trust term, which is usually two years, and any appreciation of the assets' value is not subject to estate tax.
A distribution to a trust's beneficiary could result in a lower overall tax. That may be the case because the trust will take a deduction for the distribution, and given the higher thresholds for individual filers, depending on the beneficiary's overall income level, the beneficiary may be in a lower tax bracket.
False claim - Establishing a trust will reduce or eliminate income taxes or self-employment taxes. Truth - The transfer of assets to a trust will give the donor no additional tax benefit. Taxes must be paid on the income or assets held in trust, including the income generated by property held in trust.
Establishing and maintaining a trust can be complex and expensive. Trusts require legal expertise to draft, and ongoing management by a trustee may involve administrative fees. Additionally, some trusts require regular tax filings, adding to the overall cost.
Trusts offer amazing benefits, but they also come with potential downsides like loss of control, limited access to assets, costs, and recordkeeping difficulties.
Rich people frequently place their homes and other financial assets in trusts to reduce taxes and give their wealth to their beneficiaries. They may also do this to protect their property from divorce proceedings and frivolous lawsuits.
The Loophole - The Intentionally Defective Grantor Trust
This means that the income generated by the trust is taxable to the grantor, but the trust's assets are not included in the grantor's estate for estate tax purposes.
A Living Trust can help avoid or reduce estate taxes, gift taxes and income taxes, too.
Trust Capital Gains Tax Rates
If a trust holds an investment for less than a year, the trust would pay short-term capital gains taxes at a higher rate. The federal capital gains trust tax rates on long-term gains for 2024 are: Up to $3,150: 0% Between $3,150 – $15,450: 15%
Selecting the wrong trustee is easily the biggest blunder parents can make when setting up a trust fund. As estate planning attorneys, we've seen first-hand how this critical error undermines so many parents' good intentions.
Drafting a will is simpler and less expensive, but creating a revocable living trust offers more privacy, limits the time and expense of probate, and can help protect in case of incapacity or legal challenges.
Responsibility for California trust taxes: the trustees
Ultimately, the responsibility for trust taxes lies with the trustees. As such, this also means the trust fund recovery penalty lies with them, too. The trustees, and their fees, vary depending on the type of trustee involved.
An irrevocable trust transfers asset ownership from the original owner to the trust, with assets eventually distributed to the beneficiaries. Because those assets don't legally belong to the person who set up the trust, they aren't subject to estate or inheritance taxes when that person passes away.
This rule generally prohibits the IRS from levying any assets that you placed into an irrevocable trust because you have relinquished control of them. It is critical to your financial health that you consider the tax and legal obligations associated with trusts before committing your assets to a trust.
In addition to initial funding, you can make an annual exclusion gift to an irrevocable trust each year without having to pay additional gift tax on that contribution. The 2024 gift tax exemption rate is $18,000 for individuals or $36,000 for married couples filing a joint return.
The beneficiary doesn't owe tax if the funds are considered part of the trust's principal because the funds are considered a return of money that was already taxed before it went into the trust.
Another key difference: While there is no federal inheritance tax, there is a federal estate tax. The federal estate tax generally applies to assets over $13.61 million in 2024 and $13.99 million in 2025, and the federal estate tax rate ranges from 18% to 40%.
How do trusts work? A trust is a fiduciary1 relationship in which one party (the Grantor) gives a second party2 (the Trustee) the right to hold title to property or assets for the benefit of a third party (the Beneficiary). The trustee, in turn, explains the terms and conditions of the trust to the beneficiary.
One type of trust that helps protect assets is an intentionally defective grantor trust (IDGT). Any assets or funds put into an IDGT aren't taxable to the grantor (owner) for gift, estate, generation-skipping transfer tax, or trust purposes.
To protect assets held in trust from beneficiaries' creditors. To hold, preserve and manage unique assets such as timberland, art, mineral interests and vacation properties. To hold life insurance policies, pay premiums and hold insurance payoffs to care for beneficiaries.
For estates with assets that have tremendous appreciation, a Joint-Exempt Step-Up Trust (JEST) or an Estate Trust could allow surviving spouses to sell assets while avoiding capital gains.
Parents and other family members who want to pass on assets during their lifetimes may be tempted to gift the assets. Although setting up an irrevocable trust lacks the simplicity of giving a gift, it may be a better way to preserve assets for the future.
It can be advantageous to put most or all of your bank accounts into your trust, especially if you want to streamline estate administration, maintain privacy, and ensure assets are distributed according to your wishes.