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Trust Tax Rates (Simple Trust or Complex Trust) Will Blow Your Mind

Trust Tax RatesTrust tax rates are outrageous. (See table of Trust Tax Rates below.) There are two types of trusts: a simple trust and a complex trust.  The type of  trust you get will determine whether or not you are subject to trust tax rates.

Simple trusts  include the standard estate planning “living revocable trust,” and many other trusts. One example is a Living Revocable Trust or Family Trust. Simple trusts are often used in estate planning to hold property. Most of them are revocable.

Simple trusts usually do not  have a tax ID number. If a tax ID is asked for, the grantor/trustee/beneficiary’s Social Security number is used. A simple trust is required to pay all of its income out every year to the beneficiaries. Technically, a simple trust can’t accumulate income.

On the other hand, a complex trust can accumulate income and make its corpus (trust estate) grow. Because complex trusts can accumulate income, they are required to have their own tax ID number. Even though complex trusts can accumulate income, it’s usually not wise to have the trust actually do so, because the trust will be taxed on the income it accumulates. With trust tax rates hitting 39.6% at only $12,150 it’s not good to pay taxes out of a trust. Additionally, the 3.8% Obama-care surtax kicks in at that same “top” level. Obviously, trust tax rates are outrageous. (For details, see IRS Technical Advice Memo in addition to the table below.)

Any trust, either a complex trust or a simple trust, gets a tax deduction for money it pays out to the beneficiaries. Thus, it is relatively easy to “zero out” a trust’s income and avoid paying taxes on trust money. A complex trust may have to file a 1041 tax form, but if there isn’t any income retained in the trust, the tax will be zero, even if a 1041 form is filed.

Note that when a simple trust says all of its “income will be paid out at least annually,” that doesn’t mean the money has to be transferred from the trust’s accounts to the beneficiary’s accounts. It simply means that the beneficiary(ies) have to claim all of the income on their tax return(s). Thus, a simple trust does not retain income, at least as far as the IRS is concerned.  yes, the money will still be in the trust’s account, but it has been recognized as paid out by having the beneficiary claim it as his or her income.

Think twice before letting your trust get into a position where it is subject to a tax liability. Tax rates for a trust are bad news.

Trust Tax Rates Table

If taxable income is: The tax is:
Not over $2,500 15% of the taxable income
Over $2,500 but not over $5,800 $375 plus 25% of the excess over $2,500
Over $5,800 but not over $8,900 $1,200 plus 28% of the excess over $5,800
Over $8,900 but not over $12,150 $2,068 plus 33% of the excess over $8,900
Over $12,150 $3,140.50 plus 39.6% of the excess over $12,150

Rev. Proc. 2013-15 of the American Taxpayer Relief Act set the tax rates for 2013.  These rates apply to estates and trusts. The Obama-care tax on investment income of 3.8% started in 2013 and applies to trust income above the $12,150 level. These rates are inflation-adjusted each year, so note that the rates in the table above are for 2014 and check for the year you are interested in.

For great tax saving ideas, check out my 10 Tax Tips.

Note: This post was updated on January 29, 2015.

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candy

2 Comments
  1. Hello Mr. Phillips, Thank you for your informative article. However does retention of money in the trust (while figuratively transferring income to the beneficiary for tax purposes) apply to complex trusts and if so can capital gains be included?
    Thanks, Henry

  2. Complex trusts are their own taxing entity. They need a tax ID and file a tax return. The only way they get a “deduction” for money paid to the beneficiaries is to actually transfer money out of the trust’s accounts to the beneficiaries ownership. The living revocable trust doesn’t require actual transfer, because it is a grantor trust and is “invisible” to the IRS. As long as you claim the income in the living revocable trust, the IRS considers it paid out of the trust.

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