Careful attention and thought should be considered in preparing income tax returns for trusts and estates, as fiduciaries can be held personally liable for mistakes and erroneous tax reporting positions.We are an independent, advertising-supported comparison service. Proper Tax Planning Requires Careful Considerationįor trustees and executors, it is important to review the tax provisions of the decedent’s wills and trusts with a qualified tax advisor to ensure you are administering the trust or estate in a manner that will achieve accurate tax results for the beneficiaries of the trust or estate. Transferring (something referred to as “porting”) of the deceased spouse’s unused exemption amount to the surviving spouse provides for future opportunities for estate and gift tax savings. When there is a surviving spouse, it is often beneficial to file an estate tax return for the primary purpose of electing portability of the decedent’s remaining estate tax exemption. Filing of a federal estate tax return is required when a taxpayer’s gross estate plus adjusted taxable gifts exceed the federal estate tax exemption. In addition to the income tax filing requirements for trusts and estates, there may also be a need to file an IRS Form 706, Estate Tax Return for the decedent’s estate. ![]() Additionally, any income earned by a trust or estate after the decedent’s death will be subject to trust and estate income tax rates and rules. ![]() ![]() Similarly, for a taxpayer with a revocable living trust, upon the grantor’s death, such trust typically becomes irrevocable, and the trust must obtain a separate tax identification number. In such an event, the estate must obtain its own federal tax identification number, and any income attributable to the decedent’s estate will be subject to the estate income tax rates described above and the rules described in Subchapter J of the income tax provisions of the Internal Revenue Code. When a taxpayer dies without trusts or other specialized planning, his or her estate becomes a separate legal entity for federal income tax purposes. Tax Considerations upon Death of Taxpayer Depending on the date of the decedent’s death, this may allow the trustee and executor the ability to defer income and avoid the expense of multiple tax filings. In addition to the benefit of combining the trust and estate into a single income tax return, this election also allows the estate to select a fiscal year end, as opposed to a calendar year end. Where the trust is a “qualified revocable trust” as defined under Internal Revenue Code Section 645, the trustee of the revocable trust and the executor of the estate can use a Section 645 election to treat the trust as part of the estate for federal income tax purposes. When implemented correctly during the grantor’s life, the revocable trust may allow the grantor’s estate to bypass the probate process entirely. In many cases, the revocable living trust serves as the primary estate planning document for the grantor, with the grantor’s Last Will serving primarily to “pour over” any probate assets to the revocable trust upon the grantor’s death. ![]() Section 645 ElectionĪ common estate planning document taxpayers often use is known as a revocable living trust. Qualified dividends and capital gains on assets held for more than 12 months are taxed at a lower long-term capital gains rate.įor trusts and estates during 2023, a 15% capital gains tax rate applies to adjusted capital gains of more than $3,000 and up to $14,650, with capital gains over $14,650 being taxed at a 20% rate. Capital Gains Taxįor trusts and estates, income from assets held 12 months or less (short-term capital gains) and non-qualified dividends are taxed as ordinary income. In the absence of future legislation, for taxable years beginning after December 31, 2025, these rates will sunset, and tax rates and brackets will revert back to prior levels, with increased rates and the top bracket being taxed at 39.6%. 2023 Federal Estate and Trust Income Tax Rates
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