Many of us can breathe easier now that we've ridden out the Fiscal Cliff. You may recall that the tax law changes were billed as largely restricted to those uppermost income brackets. According to this narrative, the "average" person would not see a rise in income taxes.
However, average trust beneficiary isn't necessarily a rich person, but inheritance trusts seem to one of those things quietly hit with higher taxation under ATRA 2012.
As reported in a Forbes article titled "Tax Hikes Hit Trusts Hard, Beneficiaries Pull Money Out," the new tax laws are affecting income to trusts. This new taxation has everything to do with the capital gains tax that recently jumped from 15% to 20%, plus an extra 3.8% for the Medicare surtax under Obamacare. Taken together, this tax increase adds up to a whopping 8.8% on profits held in trusts.
This gets even worse. The trust and the beneficiary pay separate taxes on the income gain in the trust and the income distributed to the beneficiary. This new increase seems to be pushing a number of beneficiaries toward "reconsidering" the trust itself.
Regardless, it's important to consider all of the positives when it comes to trusts, especially since some many beneficiaries fall fully into the "middle class." For example, trusts can protect inheritances from and for their beneficiaries. These protections include from squandering, divorces, lawsuits and even bankruptcies. Besides, do most folks want to disinherit their grandchildren in favor of their in-laws? Yes, trusts can help avoid that unintended consequence, as well.
Are you a trust beneficiary? Keep a close eye out on taxes affecting you and your trust as changes inevitably occur in the future.
Reference: Forbes (January 9, 2013) "Tax Hikes Hit Trusts Hard, Beneficiaries Pull Money Out"
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