How are trusts taxed?

Trusts are a great tool for managing your assets and ensuring they reach your loved ones after you're gone. But navigating trust taxes can feel overwhelming. This guide will break it down into simple terms.

Think of a trust as a manager for your stuff. It holds onto your assets and distributes them according to your wishes. There are different types of trusts, each with its own tax implications.

Most people use revocable living trusts. These avoid probate court and allow you to make changes later. While you're alive, the trust's income is simply reported on your tax return. After you pass away, the trust becomes separate and files its own return. Beneficiaries typically don't pay taxes on the original amount placed in the trust (the principal), but they might owe taxes on the income they receive from the trust. This is the type of trust Origin offers and recommends.

Irrevocable trusts offer different tax benefits. They can protect assets and potentially lower your taxes, but you can't change them once created. These trusts have their own tax ID number and file their own return. There are two main types:

• Grantor trusts : You, as the grantor, still pay taxes on the trust's income.
• Non-Grantor trusts: The trust itself pays taxes on its income, not you.

Trusts are taxed in tiers, similar to your own tax brackets. The higher the trust's income, the higher the tax rate.

There are also specific tax forms to be aware of:

• Form 1041: This is the tax return for trusts earning over a certain amount.
• Form K-1: Beneficiaries receiving trust income use this form to report their earnings on their own tax return.

Good news! There are ways to potentially lower your trust's tax bill:

• Charitable donations: The trust can deduct money it gives to charity.
• Beneficiary distributions: The trust gets a deduction for money paid out to beneficiaries.
• Professional fees: Costs of managing the trust can be deducted.

While this guide provides a general overview, consulting with a tax professional is essential. They can ensure your specific situation is addressed and help you minimize your trust's tax burden.

By understanding the basics of trust taxes, you can make informed decisions about your estate planning and ensure your loved ones receive your legacy smoothly.

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