Estate planners need to be aware of the many changes to the tax structure this season. While several areas have gained national attention, including personal taxes and the alternative tax, several other areas of the tax structure are being affected in 2013 as well. All individuals and families in Maryland who hold funds in trust should be aware that the new tax structure will heavily increase taxation of a trust.
The new tax plan has an Obamacare tax and an additional tax resulting from the American Taxpayer Relief Act. The Obamacare tax is for net investment income, and it is at about 3.8 percent. The American Taxpayer Relief Act increases income tax and capital gains taxes on trusts. The taxes hit trusts on undistributed income around $12,000.
The result is that people with income far below $200,000 may be affected by the taxes. This means that many middle class people may take a tax hit on their trusts, not merely people who are wealthy.
For the wealthy, the additional taxes are not likely to have a significant impact. For those of moderate incomes who sought to use a trust to protect against federal taxes, the resulting taxes may take a significant bite out of their income. Some of these trusts may have been set up to protect family members who are disabled.
There are ways to work around these changes in taxes for estate planning and administrative purposes. Grace periods are provided by the IRS that enable changes as to the time frame of distribution for taxes and other date sensitive issues, which can compensate for or reduce losses before the new tax scheme is officially applied. Maryland residents with money in a trust should consult a professional to determine the best way to protect their funds, their families and themselves against unnecessary payment into the tax system.
Source: Forbes, "Tax Hikes Hit Trusts Hard, Beneficiaries Pull Money Out," Ashlea Ebeling, Jan. 9, 2013