ESTATE-TRUSTS-INHERITANCE

ESTATES, TRUSTS, AND INHERITANCE (2024)

There are two types of taxes that apply to estates and trusts: income taxes and transfer taxes.

An estate is simply the collection of financial assets someone leaves behind after they pass away, minus any debts or liabilities.

A trust is a legal setup where a trustee holds and manages property for the benefit of others, called beneficiaries. People often create trusts to protect their assets, reduce taxes, or both.

​

Both estates and trusts are recognized as legal entities based on the assets they contain, and these assets can generate income. This income is subject to fiduciary income taxation. Essentially, if a trust or estate earns money, it has to pay taxes on that income.

​

Trusts can be either revocable—meaning they can be changed or even canceled during the person’s lifetime—or irrevocable, meaning they cannot be altered once they’re set up.

​

When calculating the tax on this income, the process is similar to how individual income tax is figured out, but with specific adjustments to account for specific rules, like deductions for income that’s passed on to beneficiaries. Importantly, the beneficiaries might be the ones who end up paying tax on certain income, rather than the estate or trust itself. This means that the tax responsibility can shift to the people who are actually receiving the money.

​

When we say that fiduciary income—income from estates and trusts—is taxed only once, we're simply stating that the income generated by these entities is only taxed at one point, not twice. Either the estate or trust itself pays the tax, or the beneficiaries who receive the income pay it, but not both.

​

Here’s how this works in real life:​

Income is Earned: Imagine an estate or trust earns money, like interest from a bank account or rent from a property it owns.

​

Distributing Income to Beneficiaries: If this income is given out to the beneficiaries (the people who will inherit the money), they are the ones who have to pay the income tax on what they received. The estate or trust can subtract this distributed income from its own taxable income, so it doesn’t get taxed on that amount.

​

Keeping the Income: If the estate or trust decides to keep the income and not distribute it, then it must pay the tax itself on that income. The beneficiaries don’t pay anything in this case because they didn’t receive anything yet.

​

Example:

Let’s say a trust earns $10,000 this year.

Scenario 1: Distributed to Beneficiaries: If the trust gives all $10,000 to the beneficiaries, they report that money on their personal tax returns and pay tax on it based on their own tax rates. The trust doesn’t pay any tax on the $10,000 because it passed it on to the beneficiaries.

​

Scenario 2: Retained by the Trust: If the trust keeps the $10,000, it pays the tax itself. The beneficiaries don’t have to worry about it because they didn’t get any money from the trust.

​

So, in short, the income from the trust or estate gets taxed once—either by the trust/estate or by the people who benefit from it, but not by both.

​

Click here for: 

​

smith, e. (2024, Aug. 22). Estates-Trust-Inheritance 2024.