Introduction
It’s natural for people to want to protect their loved ones after they’re gone. A way of safeguarding the future, trusts allow individuals to distribute assets to loved ones based on their wishes. As a bonus, setting up a trust can help limit the tax burden your family endures when you’re no longer around while enabling them to avoid a lengthy probate process. Keep reading to learn more about trusts and discover whether Arizona law requires your trust to file a tax return.
Understanding Trusts
Most people have heard of a trust, but that doesn’t mean they know exactly what the term means. Legal arrangements, trusts allow property owners to pass money and property on to their beneficiaries via a person called a trustee. It’s up to the creator of the trust to determine who will serve as trustee and how and when assets will be distributed to family and friends. Along with helping beneficiaries access assets faster by avoiding the probate process, setting up a trust can save your children and grandchildren from paying costly estate taxes.
Tax Laws for Trusts
If you’re thinking of setting up a trust, it’s important to note that they are subject to different rules of taxation than other types of investment accounts. When you put assets into a trust, be aware that your beneficiaries will be required to pay taxes on distributions from income.
Unlike income distributions, distributions from the trust principal are not taxed. Because these funds were already taxed before being placed in the trust, the IRS doesn’t require beneficiaries to pay taxes on them again. Note that the trust will have to pay interest taxes on income that is not distributed by end of year.
Important Tax Forms for Trusts
Trustees and trust beneficiaries tend to file two different types of tax forms. Upon receiving income distributions, beneficiaries will be issued a tax form called a K-1. The K-1 reveals how much of a distribution is interest income and how much is principal income. In other words, the K-1 helps beneficiaries determine tax liability stemming from their trust distributions.
Additionally, the trust must file a Form 1041, which reports income, capital gains, deductions, and losses. With this document, the trust can deduct interest it distributes to beneficiaries from its overall taxable income. Fees paid to executors and administrative costs incurred in the settling of the estate are also deductible. It’s worth noting that trustees are responsible for filing Form 1041 on any domestic trust that has taxable income in a given year.
Contact JacksonWhite Law to Protect Your Estate
If you want to protect your property and assets, creating a trust is a great call. At JacksonWhite, our estate planning attorneys have years of experience creating valid trusts that hold up in court. Our goal is to ensure that you can easily pass on everything you worked so hard to obtain while saving your beneficiaries money and aggravation. Ready to preserve your family’s future? Contact us today!
Call our Arizona Estate Planning team at (480)467-4325 to discuss your case today.