tax lawyer here - for what purposes do you use a trust? (part 2 of 4)

How are trusts taxed?

Generally, trusts are income taxed in two different ways, as “grantor” trusts or “nongrantor” trusts. A grantor trust is one that is taxed to the grantor (or other substantial owner) pursuant to the rules of Section 671 and following sections of the Internal Revenue Code.

What is a trust in law?

A trust is a fiduciary relationship whereby the trustor or grantor gives another party—the trustee—the right to hold property or assets for the benefit of a third party (usually the beneficiary). Trusts are established to provide legal protection and to safeguard assets usually done as part of estate planning.

What qualifies as a simple trust for tax purposes?

A trust qualifies as a simple trust if the trust instrument requires all income to be distributed currently, does not provide for any charitable contributions, and does not distribute amounts allocated to the trust corpus. Under Sec. 651 (a), simple trusts get a deduction for the amount of income that must be distributed in the current year.

What is a trust lawyer and do you need one?

In a trust, the creator or trustor transfers his property under the care of a trustee, who can be a trust lawyer, in favor of the beneficiary. Another reason why setting up a trust arrangement is seen as advantageous is the fact that it lowers the estate taxes that your estate would need to pay before the properties can be distributed to the heirs.

How is a trust treated for income tax purposes?

After the money is placed into the trust, the interest it accumulates is taxable as income, either to the beneficiary or the trust itself. The trust must pay taxes on any interest income it holds and does not distribute past year-end.

What are the 3 types of trust?

To help you get started on understanding the options available, here's an overview the three primary classes of trusts.Revocable Trusts.Irrevocable Trusts.Testamentary Trusts.More items...•

What is the main purpose of a trust?

Trusts are established to provide legal protection for the trustor's assets, to make sure those assets are distributed according to the wishes of the trustor, and to save time, reduce paperwork and, in some cases, avoid or reduce inheritance or estate taxes.

Do beneficiaries pay taxes on trust distributions?

The trust must pay taxes on any interest income it holds and does not distribute past year-end. Interest income the trust distributes is taxable to the beneficiary who receives it.

What are the 4 types of trust?

The four main types are living, testamentary, revocable and irrevocable trusts. However, there are further subcategories with a range of terms and potential benefits.

What assets Cannot be placed in a trust?

Assets That Can And Cannot Go Into Revocable TrustsReal estate. ... Financial accounts. ... Retirement accounts. ... Medical savings accounts. ... Life insurance. ... Questionable assets.

What are the tax benefits of a trust?

What Are the Tax Advantages of a Trust? Irrevocable trusts allow for certain amounts to be contributed annually without being subject to gift taxes. The annual exclusion for gifts is $15,000 for 2021 and $16,000 for 2022. 4 Also, their assets are generally protected from estate taxes.

Who owns the property in a trust?

trusteesOne common misconception is that the assets in the trust fund are legally owned by the trust. In fact, a trust, unlike a company, cannot own assets and instead the trustees are the legal owners of the assets.

What are the disadvantages of a trust?

What are the Disadvantages of a Trust?Costs. When a decedent passes with only a will in place, the decedent's estate is subject to probate. ... Record Keeping. It is essential to maintain detailed records of property transferred into and out of a trust. ... No Protection from Creditors.

Do beneficiaries pay taxes on irrevocable trust distributions?

An irrevocable trust reports income on Form 1041, the IRS's trust and estate tax return. Even if a trust is a separate taxpayer, it may not have to pay taxes. If it makes distributions to a beneficiary, the trust will take a distribution deduction on its tax return and the beneficiary will receive IRS Schedule K-1.

Do I need to report income from a trust?

A: Trusts must file a Form 1041, U.S. Income Tax Return for Estates and Trusts, for each taxable year where the trust has $600 in income or the trust has a non-resident alien as a beneficiary.

Is a distribution from a trust considered income?

Interest income the trust distributes is taxable to the beneficiary who gets it. The money given to the beneficiary is considered to be from the current-year income first, then from the accumulated principal. This is usually the original contribution with any subsequent deposits.

What is QSST in trust?

The main benefit of a QSST is that it is treated as a grantor trust and therefore considered an eligible S corporation shareholder. To qualify, the QSST income beneficiary must make a proper and timely election, and the trust must distribute all income to a single individual beneficiary who is a U.S. citizen or resident. If the trust also distributes corpus, it must be allocated to the same income beneficiary. The interest terminates when the trust terminates or the beneficiary dies, and at that point principal and income must be distributed to the beneficiary (or the beneficiary's estate). The trust instrument must be specific and ensure that the QSST requirements are met when it becomes effective and cannot be violated in the future.

What is the grantor trust tax return?

This means that all trust income is reported on the grantor's tax return and not the trust income tax return . Most grantor trusts file Form 1041, U.S. Income Tax Return for Estates and Trusts, containing the basic trust information (name, address, taxpayer identification number); the amount that must be reported by the deemed owner of the trust is presented in a grantor tax information letter. In some situations, the grantor trust may file a Form 1099 instead of a Form 1041, which may simplify tax reporting if the trust does not have many types of income.

Why do trusts pay higher taxes?

Because trusts generally have much lower deductions, compressed marginal tax rates, and a much lower threshold for the net investment income tax, they may incur higher income taxes than individuals, especially if they retain current income.

What is a bankruptcy estate?

When an individual taxpayer files a petition under either Chapter 7 (liquidation) or Chapter 11 (reorganization) of the Bankruptcy Code, a separate taxable entity, the "bankruptcy estate," is created. It is administered by a trustee (Chapter 7) or the debtor - in - possession (Chapter 11) and must file Form 1041 if it reaches a certain gross income threshold ($10,400 for single debtors in 2017). The administrator generally is in charge of the tax filings and must ensure that the estate receives its own employer identification number (the debtor's Social Security number is not acceptable).

What is the UTC for trusts?

Generally, trusts are governed by a local version of the Uniform Trust Code (2000) (UTC) as adopted by the jurisdiction indicated in the trust or (if there is no designation) the jurisdiction with the most significant relationship to the matter at issue. In addition, a treatise published by the American Law Institute ( Restatement of the Law Third, Trusts ), as well as the Uniform Principal and Income Act (UPIA), may apply. State versions of the UTC and the UPIA are statutory; Restatement of the Law, Trusts, provides a summary of common law as it applies to trusts, as well as guidance when the laws in different jurisdictions conflict or when the local statutory law does not address a particular issue. Trusts must also follow the specifications laid out in their trust agreement. ( Note: Oral trusts are possible, but in most states that adopted the UTC, they are recognized only if there is clear and convincing evidence supporting their creation.)

Why are trusts formed?

Some trusts are formed for tax purposes, but others are formed to achieve specific wealth management goals. The first step in appreciating the difference is to examine their general principles of fiduciary income tax liabilities.

What is the tax rate for 2017?

However, compared with those of individual taxpayers, the tax brackets are very compressed, with the highest marginal tax rate of 39.6% starting at $12,500 in taxable income for 2017. Complex trusts and estates do not have a limitation for charitable contribution deductions from gross income. (Simple trusts cannot make charitable contributions.)

What is the job of a trust attorney?

The trust attorney’s tasks also include drafting documents intended for the protection of the assets against lawsuits and taxes. The first thing that a trust lawyer must do at the start of the engagement is to make a plan based on the needs of the client.

What documents do trust lawyers work on?

After acquiring the pertinent information needed, a trust lawyer mainly works on four documents—last will and testament, living will and advance directives, power of attorney and various other trusts.

What is a trust plan?

The plan is based on the economic and financial circumstances of the client as assessed by the trust lawyer her or himself. The trust lawyer must also evaluate whether the client is married or not, the number of children, as well as incapacity issues that may be relevant as to the terms and conditions of the trust.

What is a trust in estate planning?

Setting up a trust has been a popular estate planning tool, especially if you want to leave properties and assets to your loved ones without the hassle of undergoing the probate process. In a trust, the creator or trustor transfers his property under the care of a trustee, who can be a trust lawyer, in favor of the beneficiary.

What is a requisite condition before a power of attorney is deemed effective?

A requisite condition before the power of attorney is deemed effective is the judicial declaration of a person’s incapacity. It is therefore incumbent upon the trust lawyer to secure this requisite before the power of attorney can be permitted.

Why is choosing a trust important?

There must be some strike of balance between the objectives of the client and the various statutory provisions governing the many variations of trust. It can become more complex, however, if the trust lawyer is expected to deal with a large estate.

Who is needed to set up a trust?

To assist you in setting up a trust, a trust lawyer is needed who can provide meaningful legal help to the trustee, the person who is in charge managing the trust. As mentioned above, you can even name a lawyer as the trustee, which can be helpful in cases where the estate is large and complex.

What is a trust in life?

Trusts can be very useful vehicles to control assets during life and after death. During life, they can be especially helpful to control assets during periods of disability. After death, a trust can provide asset protection, remarriage protection, asset management, and many other benefits which might not be available otherwise.

How much does Mary Smith trust receive on her 1040?

When preparing her Form 1040, Mary adds the $50,000 income the Mary Smith Trust received for the year to the income she received individually. It doesn’t matter whether the trust’s income is actually distributed to Mary or even distributed to someone else, it’s still taxed to Mary, as the grantor. Mary then dies.

What is a 1041?

The trustee of the trust has the trust file its own tax return, Form 1041. On that return goes all the trust’s items of income and expense. The nongrantor trust has its own taxpayer identification number which it gives to payers of income.

Can you give a grantor a social security number?

So, you can just give the grantor’s social security number to the bank or other payer of income and the income will be taxed to the grantor, just as if the grantor owned it outright. Even if the trust is irrevocable and the grantor isn’t even a beneficiary, it may still be a grantor trust.

Is a trust a grantor or a non-grantor?

Generally, trusts are income taxed in two different ways, as “ grantor” trusts or “ nongrantor” trusts. A grantor trust is one that is taxed to the grantor (or other substantial owner) pursuant to the rules of Section 671 and following sections of the Internal Revenue Code.

What can a tax lawyer do?

Tax lawyers can help you both before you have a tax debt issue and after the IRS has contacted you to resolve tax matters. They can handle the following: Researching Cases: Tax lawyers investigate IRS cases to identify problems and determine potential solutions.

What are the benefits of having a tax attorney?

Some of the biggest perks include: Tax attorneys can resolve complex tax issues. If you’re dealing with a serious tax debt issue, you need an experienced professional on your side. Tax attorneys specialize in resolving high-level tax problems like wage garnishments, tax liens and levies, and penalty abatement.

What happens if the IRS releases a lien on your property?

Tax Lien Release: If the IRS places a tax lien against your property, selling assets like your car or your house can become impossible. A tax attorney can work with the IRS to release its lien on your property and find another solution for repaying your tax debt instead. Wage Garnishment Removal: When the IRS threatens to start collecting its debt ...

How to hire an IRS tax attorney?

When you hire an IRS tax attorney to resolve your tax issues, it’s important to make sure you work with a reputable professional. Reviews and ratings can tell you a lot about how tax lawyers work with clients, but only the attorney’s bar association can tell you whether they’re in good standing. Check your attorney’s listing on their state bar association website to make sure they’re the reliable professional you expect.

What is Hurricane Tax?

Hurricane Tax prides itself on being a full-service tax relief firm that employs tax attorneys, CPAs, and EAs. However, the firm specializes in complex issues like releasing tax levies and liens and lifting wage garnishments. Hurricane Tax can also assist with establishing IRS installment agreements.

What degree do tax attorneys need?

Some also go on to earn a Master of Laws in Taxation (LL.M.) degree, which provides specialized preparation for working in tax law. Finally, tax attorneys have to pass the bar exam administered by their state’s bar association. This exam requires rigorous preparation and proves attorneys’ competence at practicing law.

What can a tax attorney do?

A tax attorney can build a case in your defense and represent you in court if necessary. Delinquent Tax Returns: Filing outstanding tax returns allows you to bring your account with the IRS current, but filing late can also lead to substantial interest fees and penalties.

What is the most important tax form for a trust?

The two most important tax forms for trusts are the 1041 and the K-1. Form 1041 is similar to Form 1040. On this form, the trust deducts from its own taxable income any interest it distributes to beneficiaries.

Why are trusts important?

Trusts are established to provide legal protection and to safeguard assets usually done as part of estate planning. Trusts can be used to ensure the assets are properly distributed to the beneficiaries according to the wishes of the grantor.

What is a trust and a beneficiary?

A trust is a fiduciary relationship whereby the trustor or grantor gives another party—the trustee—the right to hold property or assets for the benefit of a third party (usually the beneficiary).

What is an irrevocable trust?

The grantor—by establishing an irrevocable trust—essentially has transferred all ownership or title of the assets in the trust. There are various tax rules for beneficiaries of income from trusts, depending on whether the trust is revocable or irrevocable—as well as the type of income received from the trust.

Is capital gains taxable to a trust?

This is usually the original contribution plus subsequent ones and is income in excess of the amount distributed. Capital gains from this amount may be taxable to either the trust or the beneficiary. All the amount distributed to and for the benefit of the beneficiary is taxable to him or her to the extent of the distribution deduction of the trust.

Can a revocable trust be closed?

A revocable trust can be changed or closed at any time during the grantor's lifetime. Conversely, an irrevocable trust cannot be amended or closed once it has been opened, including those trusts that become irrevocable upon the grantor's death.

Does a trust have to pay taxes on interest?

The trust must pay taxes on any interest income it holds and does not distribute past year-end. Interest income the trust distributes is taxable to the beneficiary who receives it. The amount distributed to the beneficiary is considered to be from the current-year income first, then from the accumulated principal.

What is a client trust account?

A client trust account is a separate account used to hold client funds in trust by an attorney for the benefit of a client. Debt collection is a common use for client trust accounts.

What is the purpose of an IOLTA account?

The purpose of IOLTA accounts is to provide protection for the client. These funds cannot be pierced for bankruptcy of the law firm. In addition, IOLTA accounts provide for segregation of funds between the law firm’s general operating account and client expenses and fees unearned by the law firm.

What is an escrow account?

An escrow account is generally defined as an account whereby funds are deposited with the attorney in relation to a real estate transaction or business acquisition. This attorney deposit account operates similarly to a bank for deposit accounts.

Can an insurance broker maintain a trust account?

Insurance brokers also can maintain client trust accounts . The accounts may be inclusive of both insurance premiums and the broker’s commission. In this instance, the broker takes commission from the account and then remits the premium to the insurance company. Client trust accounts can also be interest-bearing.

Can an attorney be disbarred from escrow?

There are heavy sanctions for attorneys found to be illegally using client funds in escrow accounts. Depending on individual state laws, this could lead to an attorney being disbarred, as well as civil or criminal proceedings. If there is an instance where funds remain in an escrow account for an extended period of time and ...

Can a trust account be interest bearing?

Client trust accounts can also be interest-bearing. There are two options available to law firms for accounts that bear interest. The interest can be earned and payable to the client, in which case the client would receive a 1099 for each year in which interest is earned, for tax return reporting. The other option is for the attorney to earn ...

Do attorneys collect debt?

Of the total amounts collected, the law firm either retains a portion of the collection, representing its fee, or remits 100% of the collection in accordance with the agreement .