Volume 9, Issue 10
The Wealth Counselor
Strategies for Reducing Income that Individuals and Trustees Can Use Now
Knowing the ins and outs of reducing income in view of the new tax laws will add value to your client relationships. In this issue you will learn how:
A Quick Review of the Federal Income Tax Laws
Several significant changes to federal income tax laws went into effect in early 2013, including:
Planning Tip: Now is the time for high-income individuals and Trustees to begin looking at strategies to reduce their 2014 income tax bill. Each client’s tax situation must be evaluated individually since this type of planning is not one size fits all, or even most. We are here to discuss the options available to your clients for reducing their tax burden.
Charitable Trust-Based Tax Reduction Strategies for Individuals
While Charitable Remainder Trusts (CRTs) are commonly used to minimize estate taxes, they are also effective in reducing income taxes under the right circumstances.
A CRT is a type of irrevocable trust that pays an annual distribution to one or more individual beneficiaries for a term of years, after which the balance of the trust passes to one or more charitable organizations.
The income tax deduction rules for CRTs are complex and the amount of the deduction is limited based on several factors, primarily an individual’s adjusted gross income, other charitable giving, and what type of assets are being used to fund the CRT. Aside from being able to take this limited income tax deduction over a five year period for the value of the property transferred into a CRT, a CRT can be used to reduce a client’s income tax bill as follows:
How to Avoid the Income Tax Squeeze on Trusts
Trustees of irrevocable, non-grantor trusts (such as Bypass Trusts and Dynasty Trusts) must take into consideration their fiduciary responsibilities and plan carefully to minimize the impact of the compressed trust income tax brackets (remember, the top 39.6% tax rate kicks in at only $12,500 of trust income in 2014) and the 3.8% surtax is likely to impact all or nearly all trust income.
Since trust income distributed to the beneficiaries is not taxed at the trust level, distributions may be made to beneficiaries who are not in a high income tax bracket and/or subject to the surtax. Of course, any distributions aimed at reducing a trust’s income tax liability must be made within the parameters established in the trust agreement and applicable state law.
With these limitations in mind, income-reducing strategies that Trustees should consider include:
Planning Tip: Trustees must weigh the tax benefits of making distributions or changes to a trust against the grantor’s intent, the needs of the current beneficiaries, and what will be left for the remainder beneficiaries. We can help your Trustee clients analyze their trust’s 2014 tax liability and evaluate their options for minimizing taxes.
Final Advice for Advisors of High-Income Individuals and Trustees
Planning to reduce income taxes is a balancing act. The needs of the individual taxpayer or trust beneficiary must be carefully weighed against the overall tax savings. In addition, income, gains, losses, and tax brackets must be reviewed annually since the needs of the individual or beneficiary will change from year to year. We are available now to answer your income-tax planning questions and to work with you and your clients to reduce their income tax bills.
Sound Estate Planning, PLLC • 152 3rd Ave. South, Ste. 107 • Edmonds, WA 98020 • (425) 967-7287