Minimizing taxes on trusts
If you have established or plan to establish one or more trusts as part of your estate plan, be sure to evaluate the tax implications. Trusts have grown in popularity, but many people do not understand that there are various types of trusts which each have their own set of rules. Trusts can hold real estate, but you should take a step back and consider if that is the best option.
For 2019, trusts enter the highest tax bracket (37%) when their income tops $12,750, so it is important to consider steps to reduce the tax bite. Married taxpayers filing jointly in 2019 hit the top bracket of 37% when income is greater than $612,350.
Potential strategies include the following:
Use grantor trusts. These trusts are designed so that the trust's income is taxed to the grantor, not the trust. Avoid taxable investments. Shifting the trust's investments to tax-exempt or tax-deferred investments, such as municipal bonds or life insurance, can reduce the burden of high income taxes. Be wary; state taxes may still apply. Distribute income. Generally, non-grantor trusts are taxed only on undistributed taxable income which can be avoided if the trust distributes income to its beneficiaries. Keep in mind that shifting income to the grantor or beneficiaries is effective only if they are in a lower tax bracket than the trust.
Donating stock to charity
If you are charitably inclined, consider donating appreciated stock, instead of cash, to charity. So long as you have held the stock for more than a year and itemize deductions on your tax...