Can income tax issues be avoided by creating a trust? In a short video, Scott N. Carter, Trust Attorney, discusses how changes in laws impact trusts. A trust can be created in a way that avoids not only the estate tax but also income tax.
Income Tax Issues | Changes in Laws
Another important point that has come up very recently with income tax issues within the last couple of years is that the laws have changed. A lot of the trusts that we did many years ago or even a few years ago are now out of date. What I mean by that is the laws have changed to the point where an old-time trust is split into different trusts, with one of the trusts becoming irrevocable, which has caused income tax to be an issue.
In the old days, most estate plan attorneys were very concerned about the estate tax. Now, with the exemption having grown so large, this year it will be 11.18 million each. But it does have a sunset provision, so it will go down in the year 2026 back to $5 million plus. With that said, a married couple, anyone with an estate under, say, right now under $22 million, but even in the future under $11 or $12 million, is not going to have an estate tax.
Therefore, most people are now concerned with what we call the income tax issue, dealing with trusts. When a person passes away under the old format, the trust would split into two trusts. One of those trusts would become irrevocable, which brings in a lot of rules dealing with trustee issues and what a spouse is entitled to receive.
New Laws Mean Updating Trusts
Now, what we are concerned about is that we still like to do a split to protect spouses and children, but we do it a little differently. Also, now we have the availability through a law called portability that we can now port over, so to speak, the exemption to the surviving spouse, and we can avoid not only estate tax but we can avoid income tax at the first death and at the second death.
It can become very important because, as we know, the odds of spouses dying together are very low, and therefore there are many times a large gap. That gap creates growth – especially in the San Francisco Bay Area housing and whatnot, the growth of the assets, and that can trigger an unnecessary income tax.
One of our big advantages nowadays is that we can draft the trust in a way that we can avoid not only the estate tax but also the income tax.
An important point to point out for California is that even though we do have a very high income tax, we do not have an inheritance tax.
If someone passes away in California, the only tax to incur at death is the Federal Estate Tax. That is why it is so important to have the trust set up properly and to have it protect both the estate tax liability and income tax liability.
About: Scott N. Carter is a partner in a boutique San Jose law firm, Carter, Dougherty & McGuire. The firm’s business principles are driven by the needs of its clients. They are certified specialists in taxation, probate, estate planning, and trust law. To learn more about estate planning, setting up trusts, and how to avoid income tax issues, contact Scott to discuss and create the required documents to avoid income tax issues, probate, and a conservatorship.
Scott can be reached at 408-241-2121.