“It’s hitting where it really shouldn’t,” says Laurie Hall, an estates lawyer and head of the Wealth Management Group at Edwards Wildman in Boston. “These increases weren’t intended to hit people with income below $200,000, and they will.”
Many of us are at ease now that we’ve ridden out the Fiscal Cliff, being that the tax law changes were largely restricted to the uppermost income brackets. In fact, the “average” person may not even see a rise in income taxes. Unfortunately, there is still a chance the “middle class” may see some tax hikes if they are trust beneficiaries.
As reported in a Forbes article titled “Tax Hikes Hit Trusts Hard, Beneficiaries Pull Money Out”, the new tax laws are affecting income to trusts. This new taxation has everything to do with the capital gains tax that recently jumped from 15% to 20%, plus an extra 3.8% for the Medicare surtax under Obamacare. Taken together, this tax increase adds up to a whopping 8.8% on profits held in trusts.
This gets even worse. The trust and the beneficiary pay separate taxes on the income gain in the trust and the income distributed to the beneficiary. This new increase seems to be pushing a number of beneficiaries toward reconsidering the trust itself.
Regardless, it’s important to consider all of the positives when it comes to trusts, especially since so many beneficiaries fall fully into the “middle class.”
If you are a trust beneficiary, be on the lookout for taxes affecting you and your trust. Changes are bound to occur in the future.
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Reference: Forbes (January 9, 2013) “Tax Hikes Hit Trusts Hard, Beneficiaries Pull Money Out”