The new healthcare laws, often referred to as Obamacare, are beginning to affect trust beneficiaries and not in a good way. No longer are these worries saved those deemed quite wealthy; it’s a reality for a growing number of middle income earners.
Trusts are historically legal entities created by a person or organization and managed by a trustee for the benefit of others. Those others are typically the spouse and children. The goal is to ensure the assets can be moved away from the owners so that there are no estate taxes that kick in upon their death. It allows better options for distribution purposes, too.
Often, the first thing we hear from clients is that the rules are first, too fluid and perhaps more importantly, they’ve become bigger with each passing year. Even simple trusts have become a bit convoluted. The goal of these simpler dynamics is to pay out all the income they produce to beneficiaries, who then are able to bypass any income taxes. With grantor trusts, the creator of the entity is deemed the owner and shoulders the tax liabilities that come from the administrative rules. That leaves “nongrantor” trusts. And this is where the even bigger problems come into play.
The new – and controversial – 39.6 percent tax rate that’s courtesy of the American Taxpayer Relief Act, or ATRA, is applicable for those incomes over $400,000, but for trusts, it kicked in at an income threshold of just $11,950. Also, the 3.8 percent Medicare surtax which kicks in to the net investment income of individuals earning more than $200,000 is aiming for lower thresholds.
So what does this mean for our team of estate planning lawyers? Because our goal is to always maximize the money family members, loved ones or other beneficiaries receive, we have to work to ensure our methods – and the information we provide our clients – is both accurate and beneficial. Our highly qualified team has spent recent months doing that – we’ve reevaluated and redesigned our own patents to better serve our clients – regardless of their incomes or the size of their trusts.
Assuming that there are no capital gains income, a trust holding $1 million in assets and making a 10 percent return last year paid income taxes of $34,868 and new Medicare taxes of $3,346.
The result? Close to $7,500 more than it would have paid in 2012 on the same income.
Former Vermont Governor Howard Dean, who is currently the chair of the Democratic National Committee, offers this:
A more difficult decision is whether a trustee should consider making larger distributions to beneficiaries. If those beneficiaries are in a lower tax bracket and not subject to the new Obamacare taxes, the distribution can save a lot of money. If it’s in the discretion of a trustee to distribute assets, the additional level of tax is an aspect of what you have to look at.
Ultimately, for clients, it comes down to focusing on the details and taking a more proactive approach, especially when you consider the reactive options you’ll be left with if you wait too long. We’ve worked hard to keep these bases covered for our clients so that they can confidently move forward knowing those bases are covered.
If you have questions of if we can help in your estate planning efforts, we welcome the opportunity to do so. Contact us today to schedule a consultation. When you’re armed with the latest and most accurate information, you’re bound to make the best decisions for you and your family.