P>Music, howdy! This is David Gross, your Texas tax and law man. We're in the middle of our estate planning series. Last time, we discussed the most popular estate planning tool, the living trust, which is a flexible and changeable agreement created during our life to manage our assets. Today, let's discuss an irrevocable trust. An irrevocable trust can be created during life or death, but it generally requires that the settlor and the trustee be different people. The goal of an irrevocable trust is to separate the legal title (the ownership of the property, like the name on the deed or the name on a car title) from the person who actually ultimately receives the assets in the trust. In most situations, a parent or grandparent wants to establish a trust for a child, spouse, or grandchild and wants someone else they trust to manage the assets. This can be a trusted friend or a professional trustee. The job of the trustee is to protect the property and make it last for the beneficiary. Irrevocable trusts are often created in a will after someone dies. The decedent is the grantor. They name a trustee who manages the assets for the beneficiaries, usually the kids or grandkids, until they reach a certain age. In my practice, we regularly use irrevocable trusts to own life insurance policies. While life insurance is exempt for income tax purposes, if you own the life insurance policy on your life at the moment of your death, the IRS counts the full value of that life insurance policy in your taxable estate, for estates over the state tax exemption, which is now 11 million dollars. That means the IRS could actually impose estate tax on life insurance dollars, and nobody wants that. When the estate tax exemption was only...
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Irrevocable trust filing as an estate under sec. 645 Form: What You Should Know
The election has two purposes: to reduce Trustee liability from taxable income This is why the trust (or trustee/ executor) is required to attach a Form 1040, Schedule D. The trust's return provides information about the estate (which also needs to be filed) This form includes information about any income earned by or from the trust, and its capital gains taxes. The form is only applicable to all trusts not already described in the section 645 election. Trusts created after October 17, 2009, need to If a new section 645 election is completed, the income tax would apply to the trust's income, not to the estate. A §645 election can reduce the trust's effective tax rate on income over its taxable income Trusts can't use a §645 election to reduce the trust's effective tax rate on income that does not qualify for the income tax exclusion. Trusts created before October 1, 1980, qualify for a Section 1250 election that reduces their taxable income by more than the taxable income exclusion amount. Trusts created between October 1, 1980, and April 17, 1984, qualify for an Election to Treat a Revocable Living Trust as a Taxable Estate. This election can reduce the trust's effective tax rate on income over its taxable income, as long as the income (other than dividends and interest) passes through the trust from the beneficiary to the trust. The purpose of this election is to avoid double taxation on the trust income. The income can pass through the trustee to the beneficiary at any time Example: A's retirement assets are held by a trust on October 1, 2014. The § 1250 election to treat a revocable living trust as a taxable estate was completed on the trust's return. The trust will continue to use their gross income to reduce the trust's tax rate on the trust income. Trusts created between June 28, 1999, and June 27, 2001, qualify for a subsection (e) election to treat the trust income as a tax-exempt “qualified investment income” under IRC § 61(a) or (d). Trusts created after June 28, 2013, may also use a §1250 election, as long as § 61(a) or (d) qualified income has been included in the trust's gross income for the year.
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