How Do Trusts Get Taxed?

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Do trusts pay income tax?

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That's a great question. Like many aspects of estate planning, that question can initially seem daunting.

Some people who initially look into whether trusts pay income tax first stumble upon the federal trust income tax rates, which states that trusts (and estates) pay 37% on annual trust income that exceeds $12,750. Quite frankly, this scares people. Married couples don't pay 37% income tax unless their taxable income annually exceeds $612,350.

Here's the kicker: most trusts established these days are Grantor Trusts. When a trust is a grantor trust, the Settlor (person who set up the trust and transferred assets to his or her trust) is treated as the owner of the trust assets for income tax purposes.

When a trust qualifies as a grantor trust, the Settlor reports all trust taxable income on his or her personal return.

There are several different types of Grantor Trusts, but two common types of grantor trust include the revocable living trust (often established for probate avoidance purposes), and the irrevocable income-only trust (often established for Medicaid eligibility purposes, and in some instances, lawsuit protection purposes).

When having an initial conversation about establishing a trust, it may make some sense to say something like, "Hey, are we talking about a Grantor Trust here?"

This post is for informational purposes only and does not provide legal advice. Please do not act or refrain from acting based on anything you read on this site. Using this site or communicating with Rabalais Estate Planning, LLC, through this site does not form an attorney/client relationship.

Paul Rabalais
Estate Planning Attorney
www.RabalaisEstatePlanning.com
Phone: (225) 329-2450