Trusts are a popular estate planning tool in Texas, as they can provide various benefits, such as protecting assets from creditors, avoiding probate, and minimizing taxes. However, trusts are also subject to various taxes, and it’s essential to understand these taxes through case evaluation before creating a trust. Here are some of the key types of taxes that are levied on trusts in Texas.
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Income tax
The income tax is the first type of tax that trusts may be subject to. Trusts are considered separate taxpayers from their beneficiaries and must file their own tax return (Form 1041) if the trust has any income during the tax year. The trust must pay taxes on any income it receives, such as interest, dividends, or rental income. Additionally, the trust must also pay taxes on any capital gains from the sale of assets. However, the trust can also distribute income to beneficiaries, who will then be required to pay taxes on their income.
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Estate tax
Another type of tax that trusts may be subject to is the estate tax. The estate tax is a federal tax that is imposed on the transfer of assets at death. The estate tax applies to the value of the assets in the trust that exceeds the federal estate tax exemption amount, which is currently $11.7 million per person. The trust may be responsible for paying estate taxes on the assets held in the trust, depending on the terms of the trust and the type of trust.
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Gift tax
A third type of tax that trusts may be subject to is the gift tax. A gift tax is a federal tax imposed on gifts made during a person’s lifetime. The gift tax applies to the value of gifts that exceed the annual gift tax exclusion amount, which is currently $15,000 per person per year. If the trust makes gifts, the trust may be responsible for paying gift taxes on the value of the gifts.
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GST
A fourth type of tax to which trusts may be subject is the generation-skipping transfer tax. This federal tax is on transfers of assets to beneficiaries more than one generation younger than the grantor. The GST tax applies to the value of the assets that exceed the GST tax exemption amount, which is currently $11.7 million per person. The trust may be responsible for paying GST taxes on the assets held in the trust, depending on the terms of the trust and the type of trust.
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State taxes
In addition to these federal taxes, trusts may also be subject to state taxes. For example, some states have their own estate taxes or inheritance taxes. These taxes vary by state, so it’s essential to consult with an attorney or tax advisor familiar with your state’s tax laws.
