Need clarity re revokable trust income tax rates

[forologia]

I am confused about living trust tax provisions and would appreciate clarifications on the following questions

I remember being told that income from a revocable trust over 13k is taxed at the rate of 37%

Is this correct while the grantor is still living or only when the grantee beneficiary receives their inheritance from the trust account.

Will this maximum tax rate apply on proceeds from equity shares beneficiaries might sell in the future OR will such equity share profits be subject to normal capital gains taxes

[tagteam]

Grantor trusts are treated as disregarded entities for federal income tax purposes.

As a result, trust assets are treated as owned by the grantor(s) and any income or gain is treated as attributable to the grantor(s); the trust income tax rates do not come into play at this point.

[tagteam]

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@forologia wrote:

Will this maximum tax rate apply on proceeds from equity shares beneficiaries might sell in the future OR will such equity share profits be subject to normal capital gains taxes

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Taxation at that point will depend upon the terms of the trust and how the gains are reported.

If the trust sells the shares and retains the proceeds, the trust will pay tax at the trust tax rates (i.e., use the trust tax bracket).

If the trust distributes the shares to the beneficiaries (for them to sell), the beneficiaries will report any gain on their individual income tax returns. Similarly, if the sales proceeds are distributed directly to the beneficiaries on their K-1s, the will pay any capital gains tax due at their individual income tax rates.

[forologia]

So I will pay normal capital gains tax rates while alive

 When my children inherit their shares and decide to sell the equities  they too will pay normal cap gains rates

What will the 37% top tax bracket apply to?

[tagteam]

The top bracket will apply to any income that exceeds the maximum amount if that income is retained by the trust (i.e., not distributed) and the trust then pays any income tax due.

[tagteam]

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@forologia wrote:

 When my children inherit their shares and decide to sell the equities  they too will pay normal cap gains rates

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Note that the long-term capital gains tax rate is capped at 20% (plus 3.8% NIIT, if applicable).

[forologia]

Thanks for your response

Will the maximum tax rate also apply to my current annuity retirement income??

[tagteam]

Your trust is a grantor trust at this point, so the maximum rate is your individual income tax rate, not the trust tax rate.

[forologia]

thanks for your responses.......so will my children be subject to a normal cap gains tax if they sell the shares they inherited from the trust? Will the 37% tax rate only affect interest and dividends from their trust inheritance?

[tagteam]

Beneficiaries (your children) do not "inherit" anything from trusts. Rather, trusts (typically) make distributions of assets, income, gain, etc.

If the trust distributes the actual shares to your children, then they will take those shares at a stepped up basis (at the date of death of the grantor). When they sell the shares, gain (if any) will be taxed at the long-term capital gains tax rate which is capped (currently) at 20%. 

If the trust sells the shares, pays the tax on any gain, and later distributes the cash to your children, that distribution would be tax-free. If the trust does not pay the tax due on the gain but, instead, distributes the gain on their K-1s, then they would report the gain on their individual income tax returns.

[tagteam · Accepted solution]

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@forologia wrote:

Will the 37% tax rate only affect interest and dividends.........

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Interest and non-qualified dividends can be taxed at the maximum tax rate.

Qualified dividends are taxed at a lower rate.