What Taxes Must Be Paid When You Have a Trust?

Shutterstock

When you create your estate plan, consider setting up a trust to pass your assets on to your beneficiaries. The holdings in some trusts do not go through probate, enabling your beneficiaries to receive them faster. They also can help you save a lot of money on taxes.

Types of Trusts

Taxes on a trust and who pays for them depend on the type of trust it is. Trusts generally fall into one of two categories: revocable and irrevocable. There are many varieties of trusts, and you can design them to fit many needs, but they fall into these two categories.

• The Revocable Trust

A revocable trust, often called a living trust, means that the grantor—the person who created the trust—still has the assets under his control. He can add or remove assets when he wants, and he will pay the taxes on any gains. Gains get taxed at the grantor’s income tax bracket level.

• The Irrevocable Trust

The assets in an irrevocable trust are under the control of a trustee, and the grantor has little or no control over them. They also are no longer in the grantor’s taxable estate. The trust pays all taxes on any gains except when distributed.

An irrevocable trust enables your assets to escape the hands of creditors, but only after the assets are in it. The more assets you put into the trust, the less taxes your estate must pay. TrustandWill says that the estate tax exemption for 2024 is $13.61 million. This figure will likely revert to $5 million in 2025. You can also reduce your estate by giving individuals up to $18,000 per person each year.

• The Grantor Retained Annuity Trust 

For those who have more money, you might want to create a grantor retained annuity trust (GRAT), which is a type of irrevocable trust. It can pay you a set amount of money per year (or monthly) for a specific number of years. Taxes are paid on the assets when you put them into the trust. At the end of the set time, any remaining assets pass to the beneficiaries tax-free.