Trusts are an estate planning tool that allows people to set aside their assets for a specific purpose. Depending on the kind and purpose of the trust, these assets may be managed or distributed in accordance with the grantor’s wishes. A trust can hold money to pay for your children’s college education, or to care for a loved one with special needs. You might also put a property in a trust to ensure that you and your family will maintain its ownership.
A trust is both a legal and a financial entity subject to taxes. While determining other kinds of personal taxes may be straightforward, taxation on trusts can be complicated. Seeking the help of an experienced Long Island trusts attorney may help you gain more insight into how trusts are taxed.
At Schlessel Law PLLC, we provide quality estate planning services to help Long Island residents better plan for their future. Our team of experienced Long Island trusts attorneys can help you understand the finer points of trust taxation in New York as well as help you set up a trust that will suit your needs. Contact us today at (516) 574-9630 or fill out our online form to schedule a free consultation.
How Do New York Trusts Work?
Trusts are generally created in the same way as a will, through a legal, written document. A grantor puts their money and property in the trust to be overseen and managed by a trustee. A trustee can either be a trusted individual or the grantor themselves. The person, people, or entity who receives money or property from the trust is called a beneficiary.
Usually, a sum of money called the ‘principal’ can be put into a bank account or investment account in the trust’s name. The trustee will control this account on behalf of the grantor. Any interest earned on the account is considered the ‘income’ of the trust. The trustee must manage the trust and give out the trust assets to the beneficiaries according to how the trust document dictates.
When it comes to tax status, there are three types of trusts:
- Simple trust – The trust holds assets and distributes all of the income it makes from the assets to the beneficiaries. No part of the principal funds is distributed and the trust cannot make donations to charities.
- Complex trust – Any trust that does not typically fall under a simple trust is classified as ‘complex’. A complex trust must do at least one of the following activities within a year:
- Retain some income and not distribute all to its beneficiaries.
- Distribute some or all of its principal to its beneficiaries
- Donate some funds to charities
- Grantor trust – Any asset or property in the trust is owned by the grantor who created the trust.
Any income the grantor trust generates is taxed at the grantor’s income tax rate rather than on the trust itself. As tax rates are generally more favorable for individuals, compared to trusts, grantor trusts offer a certain level of tax protection. For simple and complex trusts, taxes are directly paid on all income, assets, and tax events.
Taxes on trusts apply on federal, state, and local (when applicable) levels. For this article, we will be addressing the 2022 income tax rates for trusts and estates at the federal and estate levels. In New York State, only New York City and Yonkers have a local income tax. To learn more about income tax rates for estates and trusts and how it applies to you, contact us today at (516) 574-9630 to schedule a free consultation. Our experienced Long Island estate planning attorneys at Schlessel Law PLLC may be able to help.
2022 Federal Tax Rates for Ordinary Trusts and Estates Income
Assets held in a trust for 12 months or less (referred to as short-term capital gains) and non-qualified dividends are taxed as ordinary income. Non-qualified dividends referred to dividends that do not meet IRS requirements to qualify for a lower tax bracket.
The federal government imposes taxes on both trust and estate income at four different levels:
- 10% for earnings between $0 – $2,750
- 24% for earnings between $2,751 – $9,850
- 35% for earnings between $9,851 – $13,450
- 37% for earnings above $13,451
If a trust earned $20,000 in income in 2022, it would have to pay taxes amounting to the following computation:
- 10% of $2,750 = $275
- 24% of $7,099 = $1,703.76
- 35% of $3,599 = $1,259.65
- 37% of $6,549 = $2,423.13
- Total taxes due = $5,661.54
Conversely, if an estate only earned $1,000, it would only need to pay $100 as it did not gain income above $2,750 which would warrant taxation at the next level.
In New York, the estate tax exemption is $6.11 million in 2022. This means that only those with estates worth higher than $6.11 million would need to pay estate taxes.
Changes from 2021
These tax rates are adjusted for inflation as determined yearly and reported for reference by the Internal Revenue Service (IRS). The tax rates remain unchanged from 2019 but the brackets increased as follows compared to the rates in 2021:
|Rate||Bracket in 2021||Bracket in 2022|
|10%||Less than $2,650||Less than $2,750|
|24%||Over $2,650 but not over $9,550||Over $2,750 but not over $9,850|
|35%||Over $9,550 but not over $13,050||Over $9,850 but not over $13,450|
|37%||Over $13,050||Over $13,450|
2022 Federal Rates for Long-Term Capital Gains Taxes on Trusts
Qualified dividends and capital gains on assets held in a trust for longer than a year are typically taxed at lower rates. These rates are referred to as long-term capital gains rates.
For income generated by both trusts and estates in 2022, the long-term capital gains brackets are as follows:
- 10%: $0 – $2,800
- 15%: $2,801 – $13,700
- 20: $13,701 and higher
Trusts typically generate most of their income through investments. However, this is not the case for everyone. Some trusts like living trusts are used to manage real estate property. Should real estate properties put in a trust generate income through rent, the income will be considered ordinary income and not capital gains.
What Are the Primary Tax Deductions for Trusts?
Gifts and Contributions to the Trust
When contributions are made into a trust, the general rule is that they are not generally subject to income taxes. This is to avoid double taxation. Trusts only pay income taxes on the money it generates and the assets they hold.
In the case of beneficiaries, they must pay taxes on distributions they receive from the trust, especially if the distribution came from income the trust earned in the current tax year. However, if a beneficiary gets distributions the trust makes from the original principal, the beneficiary would not have to pay taxes. It is important to note that the trust’s principal has already been taxed and imposing a tax on the beneficiary would be considered double taxation.
However, any money that the trust earns and distributes in the same tax year is not taxed.
In some cases, beneficiaries can avoid paying taxes if they do not meet the lifetime gift tax exemption. In 2022, the lifetime gift tax exemption is set at $12.06 million.
Tax Preparation and Trustee Management Fees
Trusts may deduct some money from its income to cover management and tax preparation fees as long as they are reasonable and only come in proportion to its taxable income.
Donations to Charity
Charity donations made in cash are deductible. However, the rule remains that the trust cannot deduct a value in donations more than the income it made.
Getting the Help of an Experienced Long Island Trusts Attorney
Our team of skilled attorneys at Schlessel Law PLLC provides quality estate planning advice. Owing to our years of experience, we may be able to help you fulfill your estate planning goals and shape the legacy you want to leave behind. Our estate planning professionals are here to determine the best kind of trust that would match your needs.
Top-rated Long Island trusts attorney Seth Schlessel understands the importance of having an estate plan reflect your needs and the needs of your family. We will work closely with you and help you navigate the legal processes in creating your trust.
Contact us today at (516) 574-9630 to schedule a complimentary consultation with Long Island estate planning attorney Seth Schlessel.