For the most part, trusts are taxed just like corporations or individuals.
Generally, living trusts are transparent for tax purposes. They do not
require a tax return while the settlor is alive, any income that goes
through the living trust is taxed directly to the settlor.
Many trusts are required to file income tax returns. But if a trust has
income of $100 in a tax year and the trustee pays that $100 to the beneficiary,
that will mean $100 in taxable income for the beneficiary and a $100 deduction
for the trustee. This deduction means the trust pays no tax on income
that passes through to the beneficiary. It is generally advantageous to
do that because trusts get into a higher tax bracket faster than individuals
do. Therefore, it’s possible to save on taxes if the trust pays
the money out to the beneficiary.
What Kind of Assets Can a Trust Hold and How Do they Change if they’re
Inside a Trust?
A trust can hold any type of asset. In fact, the most time-consuming task
in establishing a living trust is actually transferring assets into it.
It’s important that you actually do this. You won’t avoid
probate if you create a trust but fail to transfer assets into it.
For example, if you have real estate, you have to execute a deed from you
to the trustee, who will probably be you. By excuting the deed, you’ve
transferred the real estate into the trust; when you pass away that real
estate will not have to go through probate. The same thing is true with
brokerage and bank accounts, or any other substantial assets; you actually
have to have them re-title the accounts in the name of the trust.
Sometimes, people may have valuable items, like jewelry or paintings and
they’ll have to execute a document saying something like, “I,
John Smith, hereby give my (specific item and description) to John Smith
as trustee, to hold in the John Smith Living Trust.”
Basically you have to sign something like that to show that each item is
a property of the trust. When the person passes away, those items won’t
have to go through probate. Attorneys who draft living trusts typically
repeat themselves many times, telling clients to make sure all assets
are transferred into the trust.
For more information on
Tax Advantages of a Trust, a free initial consultation is your best next step. Get the information
and legal answers you’re seeking by calling
(510) 444-4430 today.