Folks with trusts, and that includes widows and the disabled, not just the ultra-wealthy, have been hit with a double tax whammy this year. First the 3.8% Obamacare tax that applies to net investment income kicked in Jan. 1. Then, the American Taxpayer Relief Act was signed into law on Jan. 2, imposing income and capital gains tax hikes on trusts akin to those on the wealthiest taxpayers.
Many of us can breathe easier now that we’ve ridden out the Fiscal Cliff. You may recall that the tax law changes were largely restricted to the uppermost income brackets and the “average” person may not see a rise in income taxes. However, the average trust beneficiary isn’t necessarily a rich person, but trusts seem to be one of those things quietly hit with higher taxation under ATRA.
As reported in a Forbes article titled “Tax Hikes Hit Trusts Hard, Beneficiaries Pull Money Out”, the new tax laws are affecting income to trusts. This new taxation has everything to do with the capital gains tax that recently jumped from 15% to 20%, plus an extra 3.8% for the Medicare surtax under Obamacare. Taken together, this tax increase adds up to a whopping 8.8% on profits held in trusts.
This gets even worse. The trust and the beneficiary pay separate taxes on the income gain in the trust and the income distributed to the beneficiary. This new increase seems to be pushing a number of beneficiaries toward reconsidering the trust itself.
Regardless, it’s important to consider all of the positives when it comes to trusts, especially since so many beneficiaries fall fully into the “middle class.”
Are you a trust beneficiary? Keep a close eye out on taxes affecting you and your trust as changes inevitably will occur in the future. If you have any questions on how the taxes may affect you, contact a competent estate planning attorney.
Reference: Forbes (January 9, 2013) “Tax Hikes Hit Trusts Hard, Beneficiaries Pull Money Out”