Wills, Trusts & Estates Prof Blog

Editor: Gerry W. Beyer
Texas Tech Univ. School of Law

Wednesday, September 11, 2013

Article on Fiduciary Taxes


Mark R. Parthemer & Sasha A. Klein (Bessemer Trust) recently published an article entitled, The Rising Tide of Fiduciary Taxes—And One Capital Gains Strategy to Help Trusts from Getting Swamped, 27 Prob. & Prop. 39 (September/October 2013).  Provided below is beginning of their introduction:

Welcome to 2013 and higher income taxes.  The new rules don’t apply only to individuals.  Taxes also increased on estates and nongrantor trusts (“Trusts”).  Tax brackets and related threshold amounts for Trusts have not been modified, however, to the same extent as those for individuals.  For 2013, a Trust will be subject to the top marginal income tax rates, 39.6% on ordinary income and 20% on capital gains/qualified dividends, plus the additional 3.8% Medicare tax (technically, the Net Investment Income Tax or “NIIT”) at the low threshold of a modest $11,950 of taxable income.

This Trust threshold is significantly lower than for individuals, who are subject to the NIIT at $250,000 (married filing jointly) and $200,000 (single) and reach top tax rates at $450,000 (married filing jointly) and $400,000 (single).  This distinction is critical because, in some cases, the trustee may have some control over who is taxed.  Further, there are strategies that may assist a fiduciary in structuring for maximum tax efficiency, thus elevating fiduciary income tax planning to heightened importance in 2013.

Most practitioners are well aware that even when interest and dividends are distributed to a beneficiary, capital gains are taxed at the trust level.  After exploring the effect of the new rates and 3.8% tax, this article explores one potential shelter strategy of allocating gains to beneficiaries as well.


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