Have an Irrevocable Trust? Have lunch with your accountant in the first 65 days of the year!

By Diane Weinberg, Morgan & DiSalvo, P.C.

With the turning of the year and our progression into spring, our thoughts turn gently to the upcoming income tax season and to the 65-day deadline for determining how much income must be distributed from your non-grantor, irrevocable trust for the prior tax year. For each tax year, the Trustees of non-grantor trusts have 65 days to distribute its trust income to pass the taxation of this income from the trust to the beneficiary.

Trusts themselves are not terribly complex creatures. Someone (the settlor) gives an item to another person/company (the trustee) to manage for the benefit of a third party (the beneficiary). Depending on the jurisdiction and type of trust, sometimes the same person or entity serves in two or all three of these roles. One of the most common examples of a trust is a qualified tuition plan, known as a 529 account. Here, a parent or grandparent (the settlors) may put money in the account which is managed by the plan (the trustee) for the benefit of a child (the beneficiary).

While trusts are not complex creatures, the tax laws surrounding who pays taxes on the income (generally interest or dividends) earned in the trust are very complex. In general, attorneys structure trusts so that either the settlor or beneficiary pay the taxes on the income earned because their tax rates will be much more favorable than the trusts’ income tax rates. Why? In 2018, the top marginal tax rate of 37% impacts single taxpayers with taxable income of $500,000, and married couples with taxable income of $600,000. By contrast, a trust needs only to have $12,500 in what is called “distributable net income” (DNI) to reach that same 37% tax rate.

If you have a revocable living trust, the trust is structured so that you are already paying taxes on the income earned in the trust. This is called a “grantor” trust, and the trustee gets to relax.

If you have an irrevocable trust, that trust may not be a “grantor” trust, and you will need an accountant to help you determine whether the trust has paid out all of its DNI. Common types of non-grantor trusts are testamentary trusts (trusts created at someone’s death), Veterans asset protection trusts, and certain special needs trusts. If the trust is not a grantor trust, then you and your accountant need to determine how much DNI needs to be distributed from the trust to avoid taxation at the higher trust rate. Fortunately, the IRS gives trustees an additional 65 days beginning on January 1, every year to make a complete distribution of DNI from the trust to avoid the trust’s higher income tax rates. In short, if you are the beneficiary or trustee of a non-grantor trust, you need to meet with your accountant to make that determination and distribution within the first 65 days of the year.

So, before the tax season begins in earnest, please schedule a meeting with your accountant to review your irrevocable trust. The attorneys with Morgan & DiSalvo do not calculate DNI, but we can refer you to an advisor who can. And, as long as you are reviewing your trust, feel free to contact Kim at 678-720-0750 or Admin@MorganDiSalvo.com to schedule a time to review your estate plan and make sure that it still meets your needs.

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