Should You or the Trust Pay a Trust's Income Taxes?

Irrevocable trusts can be set up so that the trust maker no longer pays income taxes, and the taxes are instead paid by the trust. What are the pros and cons?

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Editor’s note: This is part seven of an ongoing series about using trusts and LLCs in estate planning, asset protection and tax planning. The effectiveness of these powerful tools — especially for asset protection and tax planning — depends very much on how they are configured to work together and whether certain types of control over assets and property are surrendered by the property owner. See below for links to the other articles in the series.

An irrevocable trust agreement must be designed, drafted and implemented to deal with two primary categories of taxes: 1) transfer taxes, such as gift and estate taxes, as well as the less common generation skipping transfer tax, and 2) income taxes, such as earned income taxes, income taxes on investment or capital gains taxes, which are income taxes on property appreciation after the property is sold or exchanged.

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Rustin Diehl, JD, LLM
Attorney and Counselor at Law, Allegis Law

Rustin Diehl advises clients on tax, business and estate planning matters. Rustin serves as an adjunct professor, frequent speaker and is current or former chair of professional associations. Rustin is a prolific author and has published many technical and popular articles on estate and business issues, as well as drafting and advising legislators in developing numerous statutes pertaining to trust and estate and business planning, creditor exemption planning and digital asset (blockchain) trusts and blockchain entities known as decentralized autonomous organizations.