Planning for Trusts and the Tax Implications

Planning for Trusts and the Tax Implications

Maximize Your Trust Tax Savings in Phoenix

Trusts can be powerful tools for safeguarding your legacy, passing on hard-earned wealth to future generations and maximizing your tax savings. With those benefits also come some limitations. Not all trusts are the same, and certain options may better fit your financial management and estate planning goals. If you’d like to learn more about the tax implications of different trust plans, the team at H&H Accounting Services can help. 

Revocable and Irrevocable Trusts

A revocable trust, often referred to as a living trust, can be altered, amended or revoked by the grantor (the person who created the trust) during their lifetime. For tax purposes, a revocable trust is typically treated as a "grantor trust", meaning the trust income is taxable on the grantor’s personal tax return.


Irrevocable trusts generally cannot be altered, amended or revoked once established. Income earned by an irrevocable trust might be taxable to the trust or to the beneficiaries, depending on the terms of the trust and the distribution of income.


Establishing an irrevocable trust can remove assets from the grantor's taxable estate, potentially reducing estate tax liability (transferring assets to an irrevocable trust can have gift tax implications).


Certain types of trusts, like a Qualified Terminable Interest Property (QTIP) trust or a bypass trust, can help maximize the estate tax exemption for married couples.


Generation-skipping trusts can help avoid estate taxes on transfers to grandchildren or later generations, but they're subject to the Generation-Skipping Transfer (GST) tax.


There are a number of tax benefits that go along with storing assets in an irrevocable trust, but the primary downside is the lack of control. For some people that’s fine, but for others it’s not really a workable option.


If you have questions about the tax implications of each, the experts at H&H Accounting Services can help.


Taxation of Trusts

Trusts are separate taxable entities and need to file their own tax returns (Form 1041). Trusts may earn income from investments, which are taxable. Income distributed to beneficiaries is generally deductible by the trust and taxable to the beneficiaries.

Trusts can also be subject to the Net Investment Income Tax, which is a 3.8 percent tax on the lesser of net investment income or the excess of adjusted gross income over a certain threshold.

Estate and Gift Tax Considerations

Trusts are commonly used as estate planning tools – and you don’t need to be particularly wealthy to make good use of one. What’s a little more complicated is leveraging the beneficial attributes of trusts for gift tax planning.


Everyone has a lifetime gift tax exemption and a yearly exclusion amount. Essentially, you can give up to the exclusion amount each year without it counting against your lifetime exemption. Once you exceed the lifetime exemption, you’ll owe gift taxes.


When you transfer assets to an irrevocable trust, it's generally considered a gift to the trust beneficiaries and may have gift tax implications.


If the amount transferred to the trust is more than the annual gift tax exclusion, you'll need to file a gift tax return, and the excess will count against your lifetime exemption.


Certain types of trusts, like Crummey trusts, allow for the use of the annual exclusion for gifts to a trust, provided the beneficiaries have a temporary right to withdraw the gift.


If a trust makes a distribution to a beneficiary, it's usually not considered a gift from the trust. It is instead typically treated as a distribution of the original gift.



Transfers to certain types of trusts, like qualified personal residence trusts (QPRTs) or grantor retained annuity trusts (GRATs), are considered partial gifts because the grantor retains some interest in the trust assets.


Trust Planning Considerations for Phoenix Residents Considering Their Estate Planning Options

When planning for a trust, considerations might include the grantor's goals for the trust, the types of assets to be transferred, the potential income, various estate and gift tax implications and the trust’s impact on the beneficiaries' tax situation. 

The CPA and tax professionals at H&H Accounting Services can help navigate these complexities and provide advice tailored to your specific situation. Call us at (480) 561-5805 to discuss your goals and estate planning concerns – we’re sure we can help provide clarity and options. 

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