How assets in a trust are taxed

| Feb 28, 2020 | Trusts |

Income that is generated by a trust can either be kept in the trust or distributed to beneficiaries. In some cases, a Michigan trustee will have the ability to make distributions as he or she sees fit. However, it is also possible that the trust itself will limit the actions that a trustee is allowed to take. For instance, the document may not allow distributions to be made unless they are for educational purposes.

A trustee may also be barred from distributing money or other items to a beneficiary until that person reaches a certain age. Trustees who deviate from what they are allowed to do could be violating their fiduciary duty to the beneficiaries. They could be held personally liable for any damages a beneficiary experiences because of this breach. Trusts typically pay more in taxes compared to individuals, which is why it can be beneficial to distribute funds to beneficiaries sooner rather than later.

A trust is subject to a 37% tax rate on income totaling more than $12,950 in a given year. An individual will not reach the 37% tax bracket until he or she earns more than $518,400 in a given year. Therefore, it may be possible for beneficiaries to keep more of their inheritance by distributing it to them as opposed to keeping it in the trust.

For some, trusts can be an effective estate planning tool. It may be possible to shield assets from creditor claims or from being divided in a divorce. Holding assets in a trust might also reduce the size of an estate, which can reduce the amount of estate tax a person must pay. An attorney may be able to explain the potential benefits of a trust as well as take steps to help create one.