Part 2 in a 2-Part Series
Last year (at the end of 2018), we wrote about how to reduce the Taxable Income of Irrevocable Trusts. Click here to reference that blog. This week, we conclude our two-part series by discussing other strategies you may wish to employ before seeing your accountant in 2019. Under federal 
income tax laws, irrevocable, non-grantor trusts (such as Bypass Trusts and Dynasty Trusts) are subject to highly compressed income tax brackets. In 2018, the top 37% tax rate kicks in at only $12,500 of trust income. In addition, trusts in the top tax bracket are subject to the 20% long-term capital gains rate and the 3.8% surtax.
As part of their fiduciary responsibilities, Trustees of this type of trust must evaluate ways to reduce the trust’s annual income. After taking into consideration the terms of the trust agreement, the tax status and ongoing needs of the trust beneficiaries, and applicable state law, income-reducing strategies Trustees should consider include:
- Distributing trust income to beneficiaries so that it is taxed in their lower tax bracket.
- Making in-kind distributions of low basis trust assets to beneficiaries.
- Invoking the 65-day rule and distributing trust income to beneficiaries by March 6, 2019, which will allow the trust to deduct the income as a 2018 distribution.
- Exploring options to permit capital gains to pass to beneficiaries. This is better than being taxed inside of the trust. For instance, reform or decant the trust to broaden the Trustee’s discretion to allocate between trust income and principal.
- Shifting trust investments to minimize taxable income and gains.
- Terminating small, uneconomic trusts.
Final Considerations
Planning to minimize income taxes is a balancing act. Carefully weigh your needs and the needs of other beneficiaries against overall tax savings. In addition, review income, gains, losses, and tax brackets annually. Consider that expenses of the individual or trust beneficiary change from year to year.
We are available now to answer your income-tax planning questions. We work with you and, if applicable, your Trustee, to reduce your income tax bill for 2018. 
About Skvarna Law
A skilled attorney can assist with your estate plan. Contact us today to learn about your options (909) 608-7671. We operate offices in Glendora and Upland, California. We provide legal services for individuals living in San Bernardino, Los Angeles, Orange and Riverside Counties. This includes the cities of Upland, Ontario, Rancho Cucamonga, Fontana, Colton, Rialto, Chino, Chino Hills, Glendora, Claremont, Montclair, Pomona, La Verne, San Dimas, Azusa, Covina, West Covina, Diamond Bar, Walnut, La Puente, Corona, Norco & Mira Loma. Visit SkvarnaLaw.com to learn more.
