Broker Check

Trust Taxation Changes - High Levels of Tax at Low Levels of Income

| August 29, 2014

Nearly $0.50 of every $1.00 of income in many trusts will be removed from the trust and transferred to the government through taxes.


Income taxes increased in 2013 as a result of the new 3.8% Medicare Surtax.  As a provision in the PPACA (Patient Protection and Affordable Care Act), various forms of investment income for many trusts, estates, and individuals are taxed an additional 3.8%.


Income in trusts in the United States are taxed at the highest tax bracket when their income reaches more than $12,150 per year.  This is far less than the income level or those married and filing jointly where the income threshold is $457,600.  This high level of taxation at very low levels of income creates a significant problem for many trusts.  When their income reaches $12,150, they are taxed at $3,140.50 plus 39.6% for any income above $12,150.  As a result of the Medicare Surtax, they have an additional 3.8% on all investment income over $12,150.  Investment income includes, but is not limited to interest, dividends, capital gains, and rental and royalty income.


If the trust is to continue for multiple generations, and the income is to be reinvested instead of distributed, the trust is forced to pay 39.6% plus any income tax at the state level, if applicable.  In North Carolina, the tax rate is 5.8% for all income levels so the total tax burden is 45.4%.  When you add the 3.8% Medicare Surtax, the total tax burden for many trusts becomes 49.2%.  This makes it difficult for the assets in the trust to grow.

There are some methods available to permit extended deferral of this tax burden, for up to three generations, so your assets can grow without being impeded by taxes.