Irrevocable trusts can be made, so that the settlor no longer has to pay income taxes, but that they are paid by the trust, an irrevocable trust agreement has to be designed, drafted and implemented to account for two main categories of taxes, 1, transfer taxes, such as gift and inheritance taxes, as well as the less common generation skipping transfer tax, and 2, income taxes, such as earned income taxes, investment income taxes or capital gains taxes, which are income taxes on the appreciation of the property after it is sold or exchanged.
Both the irrevocable trust and an individual must pay taxes on all the income of the trust, in the income of the trust are included, rents of real estate, gains produced by investments of the trust, appreciation income of properties sold or distributions of trust assets, in relation to the comprehensive tax rules, all the income of the trust must be declared, in the income tax return of the trust, at the tax rates of the trust, or on the trust beneficiary’s tax return, at the individual tax rates.
Managing Taxes for Irrevocable Trusts
In other words, irrevocable trusts can be set up so that the settlor no longer has to pay income taxes, but that they are paid by the trust, take into account that the income tax rules for residents and non-US citizens are quite different from the income tax rules that you are seeing here.
The tax rates for trusts are much higher than the individual tax rates. Why wouldn’t everyone want to make an irrevocable trust so they don’t have to pay income taxes individually?, the reason it is in most taxpayers’ best interests to pay taxes individually rather than having a trust pay income taxes is because the tax rates on trusts typically tend to be much higher than the individual tax rates.
Why Trust Tax Rates Are Higher Than Individual Rates
The higher tax rates for trusts are due to the fact that an irrevocable trust only has hundreds of dollars in standard deduction, and an irrevocable trust pays the higher federal tax rate, after only a few thousand dollars of income, unless the creator of the irrevocable trust is already paying his taxes at the higher individual marginal tax rate, which is mostly times less expensive for the creator of the trust to continue paying the trust’s income taxes.
For example. A trustee with rental properties realizes that he can stop paying taxes by himself if he creates a trust, the trustee asks a lawyer to determine a trust with rental property limited liability companies for the trust to pay taxes, believing that the structure of the trust and the limited liability company can be saved a lot of taxes, when the lawyer makes the calculation of how much the trust would pay in taxes compared to the trustee who pays individually, the trust has to pay more than double taxes, the lawyer instructs the trustee that instead of the trustee paying taxes, the trustee should set up a trust with “grantor” provisions so that the trustee continues to pay taxes at the trustee’s lower tax rates.
