It’s not too late to take advantage of planning opportunities for certain trusts for 2017 tax filings. Irrevocable Trusts that do not require the trustee make distributions of income and principal to the beneficiaries can take advantage of the “65 Day Rule”. This Rule allows trustees to make distributions within 65 days of the new tax year and elect to treat the distribution as though it was made on the last day of the previous tax year. Taking advantage of this rule could provide significant tax savings to the trust, but the 65 days are up on March 6, 2018.
Similar to individuals, trusts are taxed via a graduated tax rate. For the 2017 tax year, trusts reach the highest tax rate of 39.6% at $12,400 of taxable income compared to single individuals who reach the 39.6% tax rate at $415,050. The additional 3.8% Medicare surtax applies to investment income for trusts and individuals at these taxable income levels as well. Distributing income from the trust to a beneficiary who is not in the highest tax bracket can pull income from a high tax rate environment to a lower tax rate environment.
Given recent increases to the Illinois personal and corporate income tax rates, it is important to review how your family may be impacted by another Illinois tax that does not receive as much media attention: the Illinois estate tax. Illinois is one of eighteen states to have its own estate tax separate from the federal estate tax. Estates that are exempt from the federal estate tax may still owe Illinois estate tax.
What is the Illinois estate tax?
One of the most important parts of the financial planning process is estate planning. Many people mistakenly believe that estate planning is only necessary for the wealthy. In reality, a basic estate plan is essential for everyone in order reduce uncertainty, eliminate unnecessary costs, and reduce stress for loved ones after a death.
Estate Planning Basics
The first step in the estate planning process is creating a list of your assets. Take a look at (1) what assets you have, and (2) review how your assets are titled. Once you have this foundation laid out, ask yourself what you want to happen to your assets after you are no longer here.
Have you considered making gifts or selling interests of your family limited partnership as part of your overall estate plan? If you are considering making these types of transfers to family members and/or trusts for the benefit of family members, this could be the ideal time to act in order to take advantage of potential valuation discounts currently available. The IRS is speculated to issue new guidance this fall that could negatively impact the way in which these interests are valued from an estate and gift perspective.
Estate Planning Tools
For whom: Trustees and their beneficiaries
It’s not too late to take advantage of planning opportunities for certain trusts for 2015 tax filings. Irrevocable Trusts that do not require the trustee to make distributions of income to the beneficiaries can take advantage of the “65 Day Rule”. This Rule allows trustees to make distributions within 65 days of the new tax year and then elect to treat the distribution as though it was made on the last day of the previous tax year. Taking advantage of this rule could provide significant tax savings to the trust, but the 65 days are up on March 5, 2016.
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