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Tax rates could influence how a trust is designed

| Mar 3, 2020 | Estate Planning |

Louisiana residents who receive money from a trust must generally account for it on their tax return. If money held in a trust generates revenue that remains inside of it, the trust will be responsible for paying taxes on those funds. As a general rule, the tax bracket for individuals is lower than the tax bracket occupied for a trust. Trusts pay a 37% tax rate if they generate annual income exceeding $12,950.

Therefore, it can often be beneficial to distribute funds to an individual who is likely to be in a lower income tax bracket. However, the trustee is obligated to follow the trust’s instructions when determining how to allocate assets. In some cases, he or she may be compelled to keep income in a trust until a beneficiary reaches a certain age. In others, the trustee may only be able to distribute funds to pay for a child’s education or for other limited reasons.

If a trustee ignores the trust’s instructions, it could be in violation of its fiduciary responsibility to the beneficiaries. Ultimately, the trustee could be personally liable for damages if a beneficiary or other party with standing pursues legal action. trustees are encouraged to seek the advice of legal counsel prior to making decisions about distributing trust assets.

Ideally, individuals will take tax rates into consideration when drafting estate planning documents. This may help to guide certain decisions such as when money should be distributed from a trust. It may also help guide decisions such as whether to gift or sell assets prior to passing on as that could reduce the value of an estate.