Many of us are at ease now that we’ve ridden out the Fiscal Cliff, being that the tax law changes were largely restricted to the uppermost income brackets. In fact, the “average” person may not even see a rise in income taxes. Unfortunately, there is still a chance the “middle class” may see some tax hikes if they are trust beneficiaries.
As reported in a Forbes article titled “Tax Hikes Hit Trusts Hard, Beneficiaries Pull Money Out”, the new tax laws are affecting income to trusts. This new taxation has everything to do with the capital gains tax that recently jumped from 15% to 20%, plus an extra 3.8% for the Medicare surtax under Obamacare. Taken together, this tax increase adds up to a whopping 8.8% on profits held in trusts.
This gets even worse. The trust and the beneficiary pay separate taxes on the income gain in the trust and the income distributed to the beneficiary. This new increase seems to be pushing a number of beneficiaries toward reconsidering the trust itself. This may also cause trustees to rethink when to distribute trust assets to beneficiaries, if such distribution will result in lower overall taxation.
If you are a trust beneficiary, be on the lookout for taxes affecting you and your trust. Changes are bound to occur in the future. For now, be sure to keep the differing levels of taxation for the trust and the beneficiaries in mind when setting up a new trust, or managing an existing one. The choices you make may have a direct effect on your bottom line.
For more information about trusts or other estate planning questions, please contact us at Peak Legal Group.
Reference: Forbes (January 9, 2013) “Tax Hikes Hit Trusts Hard, Beneficiaries Pull Money Out”