Article on Fiduciary Taxes

Mark R. Parthemer & Sasha A. Klein (Bessemer Trust)recently published an article entitled, TheRising Tide of Fiduciary Taxes—And One Capital Gains Strategy to Help Trustsfrom Getting Swamped, 27 Prob. & Prop. 39 (September/October2013).  Provided below is beginning oftheir introduction:

Welcome to 2013 and higher income taxes.  The new rules don’t apply only toindividuals.  Taxes also increased onestates and nongrantor trusts (“Trusts”). Tax brackets and related threshold amounts for Trusts have not beenmodified, however, to the same extent as those for individuals.  For 2013, a Trust will be subject to the topmarginal income tax rates, 39.6% on ordinary income and 20% on capitalgains/qualified dividends, plus the additional 3.8% Medicare tax (technically,the Net Investment Income Tax or “NIIT”) at the low threshold of a modest$11,950 of taxable income.

This Trust threshold is significantly lower than forindividuals, who are subject to the NIIT at $250,000 (married filing jointly)and $200,000 (single) and reach top tax rates at $450,000 (married filingjointly) and $400,000 (single).  Thisdistinction is critical because, in some cases, the trustee may have somecontrol over who is taxed.  Further,there are strategies that may assist a fiduciary in structuring for maximum taxefficiency, thus elevating fiduciary income tax planning to heightenedimportance in 2013.

Most practitioners are well aware that even when interestand dividends are distributed to a beneficiary, capital gains are taxed at thetrust level.  After exploring the effectof the new rates and 3.8% tax, this article explores one potential shelterstrategy of allocating gains to beneficiaries as well.