Trust funds and taxes

Ohio residents who are considering the use of trusts as part of their estate plan may wonder what the tax burden might be on themselves or beneficiaries. While determining the tax on trusts is a complex issue, there are a few consistent guidelines.

For the most part, taxes from income earned by revocable trusts are paid by the person who created the trust. Irrevocable trusts are separate entities from the grantor, however, and the trust itself incurs tax on any income. However, the trust can also take deductions. When the irrevocable trust begins distributing to beneficiaries, the beneficiaries are generally responsible for taxes, and the trust gets a deduction for the distribution.

Most of the time, trusts distribute income in a consistent manner that makes predicting tax fairly easy. Usually, they distribute on a regular basis to a single beneficiary who is then responsible for paying taxes on the distribution. Taxes may become more complicated with asset sales due to capital gains tax. So-called complex trusts may also generate equally complex tax situations. Even with simple trusts, people may wish to consult financial professionals to ensure they fully understand tax laws.

While taxes, administration and other issues around a trust can be complicated, there are a number of advantages to trusts in estate planning, and individuals may still wish to create a trust or trusts after reviewing the tax situation with an estate planning attorney. For example, a trust can be more private than a will because it does not have to go through probate. Trusts can also offer a variety of protections. For example, they might shield assets from creditors. They might be used to support a family member who is incapacitated and cannot manage their own finances. They can also be set up to protect and distribute wealth to family members according to certain criteria such as when children are no longer minors or reach certain ages.