Helpful Tips for Minimizing Estate and Trust Taxes


Although a tax relief plan was passed in 2012, several complications ensued in the complex world of income and estate taxes. Beneficiaries and fiduciaries should pay attention to the new changes made with the recent laws. It is also important for them to be aware of strategies that may help minimize taxes. However, immediate action is necessary for the strategies to be effective. It is especially important for fiduciaries to be familiar with the deadlines and strategies. If beneficiaries or their trusts are forced to pay extra income taxes, this could cause financial hardship.

Ordinary Income And Capital Gains Tax Rate Increases
Tax rates have increased by more than four percent. The top rate applies for individuals when they have a taxable income of $400,000 or more. For married couples, this number is $450,000 when filing jointly. The top rate applies to trusts when an individual has a taxable income of $11,950. There was an increase of five percent on the qualified dividends and long-term capital gains rate.

A new Medicare surtax was introduced, which totals almost four percent on net investment income. This includes annuities, royalties, dividends, interest, rents, income from a business or trade and gains that can be attributed to property disposition. The surtax is applied to the lesser of the excess of modified income or the net investment income for individuals. To be considered excess, the AGI must exceed $200,000. For married couples filing jointly, this number is $250,000. The surtax applies to the lesser of excess AGI over $11,950 or undistributed investment income for trusts and estates.

Ways To Minimize Income Taxes
These are some of the strategies people can use to lower their tax liabilities:

– If beneficiaries are under the income thresholds for surtax, distribute the net investment income to them.

– Minimize the surtax for Medicare.

– Make passive activities active. If three are participating in a trust, it is considered active in most cases. Appointing a non-participatory trustee can help eliminate the need to pay surtax.

– Provide distributions to beneficiaries who are in lower tax brackets. This allows income to be taxed at beneficiary rates instead of trust rates.

– If the payments to a trust are made during the first 65 days of the tax year, lower rates may apply. Making a 65-day election is a wise idea.

– Consider other factors before making distributions that would minimize income taxes. Fiduciaries should weigh the savings against distribution disadvantages. If a trust is not subject to generation-skipping taxes, the savings for tax transfers may outweigh distribution savings.

– Trusts and estates are taxed based on calendar years, but it may be possible to tax estates on a fiscal basis. Electing a fiscal year can be beneficial, and this may make it possible to add the qualified revocable trust of the decedent to the estate.

Estates electing fiscal years may see lower tax regimes. In following years, undistributed income may be taxed at lower rates without surtax in some cases. However, income that is distributed to beneficiaries will be taxed at the current year’s rates, which are subject to change in the future. To learn more about the specifics of these changes and for updated rates, call ACBI at 203-259-7580 or visit our website.

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