Advanced Trust Drafting for Income Tax Minimization: Including Capital Gains in DNI, Push-Outs and More

Description

Among the most critical tasks for estate counsel and planners is ensuring that trust documents are drafted in a way that the trust vehicle achieves the settlor’s intent in the most tax-efficient means possible. With the estate tax exemptions now permanent, the larger challenge for many drafters is to avoid or defer income tax on trust assets and accumulation. Estate planners must have thorough knowledge of the drafting techniques and considerations available to reduce income tax consequences on trust income through careful structuring of trust documents.

Estate and trust counsel should always draft trust documents with a view toward clearly delineating between income and principal in a trust document. This is particularly critical in structuring those provisions that define and allocate DNI. Because trusts are essentially a conduit, with distributions generally taxed at the beneficiary level, drafters should always be mindful to include in DNI all income that can be passed through to beneficiaries with a lower tax impact than if retained within the trust.

This is especially true for trusts that anticipate significant capital gains. The current tax treatment of trusts provides a significant incentive for getting capital gains out of a trust. Currently, trusts are taxed at the maximum rate on any capital gains above the statutory threshold ($12,500 in 2016), which results in a trust’s capital gains being taxed at a much higher rate than an individual would pay. Lower overall taxes will often be achieved if capital gains are included in DNI, rather than added to the corpus amount.

Listen as our experienced panelist provides comprehensive and practical details on drafting trust documents to minimize income tax consequences through inclusion of capital gains into DNI, and other drafting practices for income tax minimization.