Hi,
my mother recently passed away.
Her will set up a Wholly Discretionary Trust (WDT) for me.
My brother is the trustee.
We live in Ohio.
My question is about how taxes are handled for the WDT.
According to a Morgan Stanley pdf on this, INCOME tax rates for trusts in 2024 are:
- $0 – $3,100: 10%
- $3,100 – $11,150: 24%
- $11,150 – $15,200: 35%
- $15,200+: 37%
And then separately it lists Tax Rates on Long-Term CAPITAL GAINS and Qualified Dividends for Trusts as:
- $0 – $3,100: 0%
- $3,100 – $15,450: 15%
- $15,451+ 20%
In addition, it mentions Net Investment Income Tax of 3.8%. It seems this might only apply to individuals?
I'm struggling to understand a few things.
1. What is considered INCOME vs. CAPITAL GAINS for my WDT?
It's obvious for an individual, but how does a trust earn income? It can clearly earn capital gains by investing in a stock index and then realizing those gains by selling some of the stock. But income? It's not as if the trust is working and earning money, etc.
2. We anticipate that the WDT will earn about 8% in stock index each year, which would be about $20,000 per year of unrealized capital gains.
-If my brother leaves the whole $20,000 unrealized gains alone and neither sells it to realize the capital gains nor distributes it to me, as I understand it the $20,000 won't be taxed for that year. Is that right?
-Let's say he begins at a certain point to DISTRIBUTE say $12,000 per year to me. As I understand it, if he distributes $12,000 to me, in 2024 that will be taxed at the CAPITAL GAINS brackets listed above, so a $12,000 distribution to me would result in $1,335 of tax, is that right?
This seems very high for such a low income. As this will be my only source of income, is there any way to avoid paying such high taxes on a distribution of just $1,000 per month?
THANK YOU!
