The temporarily doubled gift, estate, and generation-skipping transfer tax exemption has resulted in the creation of many new irrevocable trusts. Some of these are grantor trusts, and thus the grantor continues to pay the income tax on the trust income. However, trusts that are non-grantor face income tax challenges. Planning for those trusts is the focus of this article.
In 2022, irrevocable trusts pay tax at the top tax bracket of 37% when undistributed taxable income is $13,450. Individual beneficiaries pay tax at the top tax bracket when taxable income is $539,900 for singles and $647,850 for married individuals filing jointly. Thus, there is a need for planning to determine whether to distribute income to a beneficiary to arbitrate the tax rates between the individual beneficiaries and the trust. There are several taxes at play—net investment income tax, ordinary income tax, capital gains and losses—as well as potential new tax legislation.