Trusts are invaluable tools in estate planning when it comes to securing your financial future and ensuring that your assets are handled according to your wishes. However, the intricacies of trusts and their tax implications can feel like deciphering a complex legal code. Fear not; we’re here to demystify trusts and shed light on what your estate planning attorney wishes you knew. This article outlines trust basics, types of trusts for estate planning and tax implications for 2023 and 2024.
Trust Fundamentals: Understanding the Basics
Trusts are based on three elements: the legal document for the grantor/creator who funds the trust or transfers their assets, the trustee named to administer or manage the trust according to the terms and beneficiaries to receive the assets once the grantor is gone.
Trusts are a go-to tool in estate planning. They serve different purposes for estate owners planning, from college funds to keeping a beloved home in the family for generations. Let’s walk through the fundamental types of trusts based on SmartAsset’s article, “Trust Tax Rates and Exemptions for 2023 and 2024.”
A trust can be revocable or irrevocable and is often used to avoid probate. The trust creator could also be the trustee and beneficiary to have access to and income from the trust. Revocable trusts are flexible and allow easy changes or cancellations. Irrevocable trusts are not easily changed or revoked but are most often used to exclude assets from an estate.
Simple Trust
This straightforward trust model holds income-producing assets. All earned income, such as dividends, is distributed to beneficiaries without tapping into the principal. The one caveat with a simple trust is income distribution at least once a year or annually.
Complex Trust
Offering more flexibility, a complex trust may retain some income, distribute principal and allocate some funds to charitable causes. The trust’s principal assets include real estate, investment-generating dividends, cars, bank account funds and jewelry.
Grantor Trust
With the grantor maintaining control, this trust allows for more hands-on management of assets and tax responsibilities.
What the Tax Terrain: 2023 vs. 2024 Means for Estate Planning
Trusts are not immune to paying taxes. Working with an estate planning attorney can help you implement the trust that best fits your intentions. Irrevocable trusts can shield assets from taxation. However, IRS rules are changing that.
Here’s a glimpse into the tax brackets for both 2023 and 2024:
- 2023 tax brackets range from 10% to 37% for ordinary income and from 0% to 20% for long-term capital gains.
- 2024 slight adjustments see brackets for ordinary income ranging from 10% to 37% and for long-term capital gains from 0% to 20%.
Understanding these tax nuances can empower you to make informed decisions regarding your trust’s financial management.
Key Takeaways:
- Trust Basics: Trusts consist of a grantor, trustee, and beneficiary.
- Trusts and Taxes: Trust income is subject to taxation, with rates varying based on the type of income and the tax year.
- Types of Trusts: The most basic types of trusts are revocable, irrevocable, simple, complex and grantor.
- Trust Creation: A seasoned estate lawyer can provide invaluable guidance, ensuring that your trust aligns with your long-term financial goals.
Conclusion
Embarking on the estate planning and trust management journey can be daunting. However, you don’t have to navigate these waters alone. Seek the guidance of a trusted estate planning lawyer to chart a course that safeguards your assets and secures your financial legacy for generations to come.
To learn more about estate planning in the East Valley, Gilbert, Mesa and Queen Creek, schedule your free consultation with Attorney Jake Carlson by using one of the links above.
Reference: SmartAsset (Jan. 5, 2024) “Trust Tax Rates and Exemptions for 2023 and 2024.”
