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Year-End Trust Distribution Planning

Posted 2:21 PM by

Starting in 2013, trusts, like individuals, are subject to the higher tax rates on qualified dividends and long-term capital gains (i.e., 20% instead of 15%), as well as the Medicare surtax (3.8%). However, unlike individuals, trusts are subject to these rates at a much lower income level:

  • Trusts: $11,950 for both the 20% and 3.8% rates
  • Individuals: 400,000 for single filers or $450,000 for joint filers (20% rate), and $200,000 for single filers or $250,000 for joint filers (3.8% rate)

Further, trusts hit the top rate of 39.6% for ordinary income in excess of $11,950; for individuals, it is $400,000 for single filers or $450,000 for joint filers.

In general, if a trust makes a distribution to a beneficiary, then the beneficiary, not the trust, is taxed on the income. Therefore, it might be desirable for trusts to make distributions to beneficiaries so that the trust income will be taxed to the beneficiaries at their rates instead of the potentially higher trust tax rates. However, it is important to consider whether the trust is authorized to make distributions and whether it is wise to make distributions from a non-tax perspective. For purposes of carrying out 2013 trust income to beneficiaries so that the income can be taxed to beneficiaries at their rates instead of trust rates, trusts have until 65 days after year-end (March 6, 2014) to make a distribution and treat it as a distribution for 2013.

As an example, if a trust has long-term capital gain of $50,000 taxed at the trust's 23.8% rate instead of the individual's 15% rate, then the tax savings of passing the long-term capital gain out to the beneficiary is $4,400 (8.8% x $50,000).

In determining whether trusts should make distributions, keep in mind that if a trust is required to make a distribution (for example, trust accounting income), the distribution is deemed made as of 12/31, even if it is not actually made. However, if the goal is to pass out additional income such as capital gains, the accounting income and capital gains must all be distributed by March 6, 2014.

If you have additional questions, please contact your KSM advisor.