Most of us are cautious when it comes to taxes. We don’t want to pay more that we should, and we most certainly do not want to evade legitimate taxes and be penalized. So when discussions of the use of Trusts in Estate Planning, Medicaid Planning or Long-term Care Health Care Planning comes up, taxes are on everyone’s mind.

Who Pays the Taxes?

Assets in a Trust can be routed to be the responsibility of the Trustmaker, or the Beneficiary or the Trust itself. Trust’s are taxed at a higher tax rate that individuals, and therefore many people are concerned about the wisdom of placing assets in a Trust when taxes are going to be higher than they would have been at the individual income tax rate. Trusts tax rates start at 15% and go upward, whereas individual income tax rates start at 0% and go upward. The tax rate of the Trust, although higher, would only apply to the gains that the principle of the Trust produces. In most cases, when used properly the increases / growth of the Principle will be spent annually on the beneficiaries and therefore will not create any tax burden.

Taxes Triggered By Transfers into a Trust

Sometimes Trusts are funded by assets that were previously in a tax-deferred status. These may include liquidating a 401K, a 529 Plan, IRA’s, or one could evoke early withdrawal penalties on a Certificate of Deposit or an Annuity.

Our fear of higher taxes is often misguided. The taxes and penalties incurred are almost always far less or at least outweighed by the advantages that the overall planning strategy provides. Your Elder Law Attorney will guide you through the priorities as they develop the plan with you and your family. Essential to that discussion is what are your long-term goals for the assets? What are the Health Care considerations that are likely to arise over the remaining years of the individual or couple’s life?

In fact, many issues be essential to the plans. It is paramount that you consult a experienced Elder Law Attorney to guide you through this process. Contact us for more information.