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Estates and Trusts

Trust Basics

Trusts are legal agreements that allow for the ownership of certain assets to be transferred from the grantor (one who creates the trust and funds it with assets) and controlled by a trustee for the benefit of a beneficiary. Trusts don’t necessarily take personal ownership of an asset away from the trust beneficiary—especially when the beneficiary retains control by also being the trustee. However, some trusts are established with third-party trustees acting as fiduciaries.

When properly structured, trusts can protect trust property from:

• Creditors
• Probate
• Reallocation in a divorce settlement
• Certain tax obligations

Taxation of Trusts

Trusts can also give individuals and couples a level of control over their legacy after they’ve passed because the trust document can specifically detail how and when assets are to be distributed to beneficiaries.

A trust’s treatment for tax purposes is determined by the trust document, which highlights the importance of involving your CPA from the beginning of the trust creation process. Then, the Internal Revenue Service (IRS) applies roughly the same rules to the taxation of trusts as it does to the taxation of individuals, although trusts are considered a separate legal entity. Therefore, the following five statements outline the taxation of trusts.

1. If the trust is a revocable trust, and the grantor is also the beneficiary, then the trust is basically ignored for tax purposes. All income generated by the trust assets is reported on the Form 1040 of the grantor/beneficiary. 
2. With some modifications, the taxable income of the trust is calculated in the same manner as an individual.
3. The trust gets to take a tax deduction for the amount of taxable income that is distributed to the trust beneficiaries.
4. The trust pays income tax on the taxable income that is left after the distribution deduction.
5. The beneficiaries report income and pay tax on the distributions of taxable income they received.

Irrevocable Life Insurance Trusts - read more


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