Trust taxes are taxes that are assessed on the assets of a trust. Trust taxes may consist of income taxes on the income generated by the assets in the trust, or of capital gains taxes on the gains made when trust assets are sold. Trust taxation can be fairly complicated and should be carefully addressed in estate planning discussions with a financial adviser and attorney. There are many types of trusts and they can be taxed differently. Trust taxes are an important consideration when determining the type of trust to set up.
In a trust, property is managed by one person for the benefit of another. The person who manages the trust is called the trustee, and the person who benefits from the trust is called the beneficiary. The original owner of the property contained in the trust is called the settlor. Any type of property, including money, stocks, or real estate, can be included in a trust. Trusts are often set up by parents for the benefit of their children upon the death of the parents.
In the United States, the taxes on the income from a trust can be the responsibility of the settlor in the case of a grantor trust, the responsibility of the beneficiary in the case of a simple trust, or the responsibility of some other entity in the case of a complex trust. Trusts are often used to minimize or avoid estate taxes when transferring wealth from one generation to the next. They can also be used to ensure that assets that are left to heirs are disbursed in the way the decedent intended, for instance, by providing a monthly or annual income to the heir, as opposed to a lump sum of money.
Trusts can also be used to provide assets to those who are unable to manage them on their own. Trusts are often set up to benefit minor children or individuals who have special needs. In these cases, the trustee would manage the assets for the beneficiary. In the case of a minor child, the trust assets would transfer to the child once he reaches the age of majority.
Because of its complexity, the creation and taxation of trusts should be handled by a competent attorney. Attorneys who draft trusts and wills can often explain complicated laws involving trust taxes. Wills and trusts should be a part of any estate plan, particularly if there is a large amount of money involved, or if the heirs are minors or have special needs.