As an estate planning attorney, Lisa DiFranza, works directly with our clients to draft the legal documents they will use to manage their assets while they are alive and after they pass away. The more complex estate plans include inter vivos trusts, also known as living trusts or grantor trusts, and testamentary trusts. Trusts are used to hold your assets for your benefit during your life and to benefit your designated beneficiaries after your death. An inter vivos trust (living trust) goes into effect immediately while you are alive, and a testamentary trust is detailed in your will and goes into effect only when you pass away.

When creating trusts for our clients, a primary concern is how it will be taxed. While Lisa DiFranza is an attorney at DiFranza Law, not a financial advisor or accountant, she stays up to date on the tax rates, so she can properly advise our clients based on their desires.

If you are considering a trust or have a trust, read this article to learn the truth about trusts and taxes.

History of Taxes

Understanding the history of taxes and Marginal Tax Rates is an important aspect of estate planning and trust asset planning since assets and income are deferred.  Our clients need to know there is a risk when deferring compensation or income.  Further, there is a great deal going on around the world that is affecting the need for increased taxes, so it is vital for clients to understand how it all works together.

The roots of the IRS go back to the Civil War. In 1862, President Lincoln and Congress created the position of Commissioner of Internal Revenue and enacted an income tax to pay for war expenses. The first form 1040 appeared in 1913 after Congress levied a 1 percent tax on net personal incomes above $3,000 with a 6 percent surtax on incomes of more than $500,000.

In 1918 during World War I, the top rate of the income tax rose to 77 percent to help finance the war effort. It dropped sharply in the post-war years, down to 24 percent in 1929, and rose again during the Depression. During World War II, Congress introduced payroll withholding and quarterly tax payments.

In 2017, the Tax Cuts and Jobs Act made significant changes to the individual income tax, including lower marginal tax rates across brackets and reforms to itemized deductions.

Taxes Imposed on Trusts

When taxing a trust, the IRS will tax the taxpayer based on how they are filing: as an individual or an entity such as a business, estate, or trust. Trusts must file a Form 1041 if the trust has a gross income of a certain amount or has a taxable income for the tax year or a beneficiary who is a nonresident alien. A trust may be subject to income, gift, estate, excise, and generation-skipping taxes. Therefore how the trust documents are written is very important.

Contact DiFranza Law Today

If you are looking for an estate planning attorney in Jacksonville, FL, or simply need someone to advise you on trusts, at DiFranza Law, we understand the different types of trusts and the risks associated with deferring assets and income. Click here to request a consultation.