As the end of 2013 approaches, trustees will need to make important decisions about making discretionary distributions to minimize the impact of the new Medicare surtax.
Starting in 2013, a trust will be subject to the 3.8% Medicare surtax if it has undistributed net investment income of more than $11,950. This means that a trust with investment income of more than $11,950 will pay income tax at the rate of 39.6% as well as the surtax of 3.8% on all investment income over $11,950. That’s a total tax of 43.4%!
To reduce this tax, you may want to consider making distributions to trust beneficiaries who would not be subject to the Medicare surtax on their individual returns. Distributions can be made up to 65 days into 2014 (until March 5) and still count as 2013 distributions. This allows you to look at income for the year for both the trust and the beneficiaries and then decide if and how much to distribute.
Although the Medicare surtax applies individuals too, it starts at a much higher threshold level than it does for trusts. For single individuals the threshold amount is $200,000 and for married individuals the threshold is $250,000. Making distributions to young adults, who are no longer subject to the “kiddie” tax, as well as to any adult beneficiary who has income well below the thresholds would be worth consideration.
Obviously taxes are not the only issue to consider when deciding whether or not to make trust distributions. The goals and purposes of the trust, as well as the age and maturity level of the beneficiaries are also very important considerations. There may be very valid reasons for paying the additional taxes at the trust level and not making the distributions. Either way, now be may be the time to talk with your tax advisor about these tax law changes and their impact on your trust’s total tax liability.
Contributed by Karen L. Rohde, CPA, CSEP, a manager in RKL’s Tax Services Group. Her responsibilities include serving clients in individual tax compliance and consulting, trust and estate tax compliance and estate planning.