How income generated by a trust is taxed

On Behalf of | Oct 8, 2015 | Trusts

Many Las Vegas residents set up trusts as part of their estate planning strategy. Trusts can help to reduce estate taxes, protect assets from creditors and provide beneficiaries with regular income disbursements over a long period of time. While trusts are very useful for estate planning, they are still subject to taxation.

Understanding how a trust will be taxed can be complicated, but the most important thing to know before setting up a trust is the difference between a revocable and irrevocable trust. When a revocable trust is created, the grantor of the trust must pay taxes on any income that the trust generates during the grantor’s lifetime. An irrevocable trust is viewed as a separate entity for tax purposes and must pay taxes on any income that it generates.

When beneficiaries receive distributions from a trust, they assume the responsibility to pay taxes on what they have received. The trust itself will receive a tax deduction for all distributions up to the amount of the trust’s net income. A trust is usually designed to disburse all taxable income to beneficiaries so that the trust can receive a full deduction for the income it generates and have no tax liability.

An estate planning attorney may be able to help a family to understand how specific types of trusts are taxed. By understanding how trust taxation works, a family may be able to design a trust to maximize deductions and reduce the trust’s taxable income. During trust planning, an attorney may also be able to help a family provide for charitable beneficiaries as well as family members.