A trust is a legal entity created to hold assets separate from the person that actually buys them. Trusts that are set up as living or revocable trusts have no tax-planning benefits – they're typically just used as tools to facilitate easier asset transfers. Irrevocable trusts, on the other hand, can be used to transfer assets and avoid estate tax.
Testamentary and Living Trusts
There are several types of trusts that you can choose from to help transfer property or assets; however, testamentary and living trusts are the two main categories.
With testamentary trusts, assets are only transferred to beneficiaries upon the death of the grantor. Living trusts, on the other hand, are created during the grantor’s life, but can continue after death. Living trusts can be revocable or irrevocable and also can help avoid probate.
If you have inherited a trust, you may want to consider consulting with an estate attorney or certified tax professional who can guide you through the next steps.
Valuing Inherited Trust Property
Before calculating the tax due on inherited trusts, the property in the trust has to be valued. When the property is in a revocable living trust, it's in a legal limbo zone. For the purposes of probate law, the asset belongs to the trust, but for tax law, it's treated as if the decedent owned it.
As such, the property gets revalued as of the date of death. The Tax Code requires the person who inherits the property to use that value when it comes time to calculate estate or capital gains taxes.
Calculating Trust Inheritance Tax
Once the contents of the trust get inherited, they're just like any other asset. Income from the inherited investments is subject to the same tax rates as any other income of that type.
When you sell assets that you inherit and you make profit, you'll pay capital gains taxes as well. However, the capital gains taxes get calculated relative to the profit between the selling price and the value at which you inherited the property.
When you inherit from an irrevocable trust, the rules are different. The IRS treats property in an irrevocable trust as being completely separate from the estate of the decedent. As a result, anything you inherit from the trust won't be subject to estate or gift taxes. You will, however, have to pay income tax or capital gains tax on your profits from the assets you receive once you get them, though.
Living Trust Tax for 2019
Properties held in a living trust are subject to both the gift and estate taxes. The annual gift exclusion for tax years 2018 and 2019 has been set at $15,000, while the exclusion for an estate is $11,400,00, up from $11,180,000 for 2018 You can transfer this amount to your beneficiaries tax-free.
This information will be helpful to you in your personal estate tax planning. It may be possible to gift some of your property during your lifetime and pass it on to those you choose after you pass on completely tax free.
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.