What Are The Tax Implications Of A Trust?

When most people think of a trust, they picture rich families fighting over an inheritance. But you don’t have to be wealthy or have vast land holdings to create a trust. The primary advantage of a trust is that it avoids the probate process, which can be a long and expensive ordeal. For that reason, many of our clients turn to trusts as a way to ensure that their assets are distributed in the way they intended as quickly and as inexpensively.

There are two general types of trusts, each with its advantages and disadvantages when it comes to taxes. Let’s take a closer look at them and their tax implications.

Types of Trusts

  • Revocable Trust: A revocable trust, also known as a living trust or an inter vivos trust, allows you to avoid the probate process, and the estate’s assets are passed directly to your beneficiaries. In this type of trust, the settlor (the creator of the trust) and the trustee are usually the same person. If you are both the settlor and the trustee, you will also designate a successor trustee to take over when you become incapacitated or pass away. 
  • Irrevocable Trust: Although not as flexible as a revocable trust, an irrevocable trust provides greater asset protection and can allow you to avoid some estate taxes. When you establish an irrevocable trust, you transfer the property to the trust and are no longer the owner.

While avoiding the costs of probate, a revocable trust does not protect your estate from estate taxes. If you pass away with more than approximately 13 million in your taxable estate, your estate will pay the estate tax before passing any money on to the beneficiaries. You might have heard this referred to as the “death tax.” If you have an irrevocable trust and your estate is large enough to be subject to federal estate taxes, you can reduce or possibly eliminate these taxes. This is because the assets placed in an irrevocable trust are no longer considered part of your taxable estate.

Types of Taxes

Just like a lot of laws in the United States, the laws regarding estate tax, inheritance tax, and federal estate tax differ greatly from state to state. That’s why, when you are ready to jump into estate planning, you should consult an experienced, knowledgeable estate planning attorney in your state.

Estate and Inheritance Taxes in Virginia

The Commonwealth of Virginia has no estate tax. There are other considerations, however, that would require an estate tax to be paid, such as property of the estate that is in another state. Your estate planning attorney can help you see if this pertains to your estate.

Virginia also has no inheritance tax, which is a tax imposed on the beneficiaries after they receive their share of the estate. However, an inheritance tax may apply if the decedent lived in a state that does impose an inheritance tax.

Federal Estate Tax

The federal estate tax applies to residents of all 50 states, taxing amounts over $13.61 million. The tax imposed for amounts over that exemption would range between 18% and 40%. This tax is also portable, meaning that a married couple can protect up to $27.22 million. However, the current estate tax exemption amount is set to sunset at the end of 2025 if Congress fails to extend the applicable legislation. If Congress doesn’t act, the federal estate tax exemption will revert to five million dollars per person, adjusted for inflation.

Miscellaneous Taxes

In addition to those presented above, there may be other taxes an estate may have to pay, including capital gains taxes and local taxes depending upon where the estate is recorded. 

Confused yet? It’s no wonder. In addition to all we have noted above, there are specific rules and regulations associated with each tax. That’s why Jennifer Porter Law, PLLC, is ready to help you. We have experienced, knowledgeable estate planning attorneys who are up to date on all the estate tax laws. Let us unravel this cat’s cradle of taxes for you and advise you on the best plan. Call today at  (571) 532-9070 for a consultation.