Discretionary Trust Distributions: Minimizing Income Tax, Analyzing the Trust Document, Meeting Fiduciary Obligations

Description

Making trust distributions can often reduce the overall taxation of beneficiaries and trusts. For trusts, the 2020 top tax rate of 37 percent begins at a mere $12,951, while the top individual income tax rate of 37 percent begins at $518,401 for single taxpayers. Trusts are also subject to the additional 3.8 percent net investment income tax. Distributions to beneficiaries can be made during the year and up to 65 days after year-end by Section 663(b) election.

Trust instruments guide distributions, including limitations and discretionary powers. Distributions are commonly allowed and exercised for HEMS-- health, education, maintenance, and beneficiary support. At the same time, trusts are formed to protect and preserve assets. Trustees sometimes struggle to meet fiduciary standards while exercising distribution powers. Trustees and trust advisers must weigh the loss of asset protection and estate tax consequences of discretionary distributions against potential income tax savings.

Trust and estate advisers must analyze the trust documents, tax consequences, and fiduciary obligations to determine when discretionary distributions can and should be made.

Listen as our panel of fiduciary experts explains mandatory vs. discretionary distribution, common trust distribution clauses, and meeting fiduciary duties to provide the best outcome for a trust and its beneficiaries.