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A Quick Lesson In Trusts & Income Taxes

In this Elder Law Minute, Wes Coulson discusses how trusts and income taxes operate together.

Transcript:

Back many many many years ago when I was in law school, I and most of the rest of the class sat glazed through the professor’s attempts to explain the tax laws as they relate to trusts. Let me give it a go in about two understandable minutes.

Let’s start with the basics — The IRS is in the business of collecting taxes on income. Well, in order to do that, they need a taxpayer. That’s why whenever you open a bank or a financial account, they ask for your social security number so they can send you a 1099 copy to the IRS so the IRS will know that you’ve made some income. Well, when you have a trust, it first depends on what type of trust it is.

If it’s a living trust, it’s still you; you don’t need a tax ID number, everything is the same as before. If you do an irrevocable trust, legally that’s not you anymore so the IRS raises a hand and says, “wait a minute, we need a taxpayer here.” That’s why those  types of trusts have to get their own tax ID number. It’s known as an EIN.

Then the next question comes: the trust generates income, who is going to pay the tax on it? Well, the IRS says, you know we don’t so much care as long as we have a taxpayer. So, the rule on that is if the trust distributes income out to one or more beneficiaries, whoever winds up with the income for that year, you show that to the IRS and that’s who pays the taxes on it. If the trust income stays in the trust, then by default the trust has to pay the taxes on it.

You don’t want the trust to be the taxpayer because trusts get a very very measly exemption and they rocket through the tax brackets to get up to the top one after a very small amount of income. So, that sort of explains the strategy when we have  trusts. We want them to distribute out income.

Also looking for information about Medicaid and Asset Preservation? Visit these articles:

    • Do Living Trusts Protect Assets From Medicaid or VA Spend Down?
    • How an Asset Preservation Trust Protects Your Life Savings From Long-Term Care Costs
    • Why Do I Need an Asset Preservation Plan?

“Your Trusted Advisor on the Elder Care Journey”

Coulson Elder Law is dedicated to providing families in the St. Louis area with their Elder Law needs. Our practice areas include Asset Preservation Planning, Veterans Benefits, Medicaid Eligibility, Alzheimer’s Planning, Special Needs Planning, Estate Planning and more. We understand the financial challenges you may face as you and your loved ones grow older. At Coulson Elder Law, our clients’ well-being is our number one priority. For immediate help, call (618) 632-7000 (IL) or (314) 567-9292 (MO), or Contact Us and we will get in touch as soon as possible.

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Common Estate Planning Mistakes

Mistake #1 - Failing to appreciate how assets pass upon death

Mistake #2 - Risks of Joint Accounts

Mistake #3 - Trying to plan an Estate around specific assets

Mistake #4 - Assuming that you can always change things later

Mistake #5 - Failing to consider the ages of people you name as fiduciaries

Mistake #6 - Trying to 'Do it Yourself'

Mistake #7 - Failing to include enough powers in a Power of Attorney for Property

Mistake #8 - Failing to address the possibility of a second spouse disinheriting children from a first marriage

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774 Sunset Blvd Suite 200
O’Fallon, IL 62269

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