Estate planning is an essential part of creating a solid plan for your future. With an estate plan, you can lay out a specific plan for how your assets will be used after your death, as well as how your healthcare providers will address your healthcare needs or who can handle your affairs while you are unavailable or incapacitated. There are many reasons to ensure your estate plan is in place, and protecting your assets is one of the most important. Taxes can take a big chunk out of your assets after your death if you do not have the proper estate plan in place. Trusts are a useful estate planning tool for many, so it is important to understand how taxation will impact your trust.
With a trust, the grantor puts assets into the trust and makes specific instructions about how those assets are to be used. The trustee is responsible for administering the trust in accordance with the grantor’s instructions contained in the trust documents. The beneficiary is the person who receives the distributions from the trust. Clearly the grantor intended the beneficiary to receive the maximum value from the trust and the distributions. However, trust taxation can change how a grantor should think about the trust and its administration.
Minnesota income tax will generally apply to most residents. This income tax can also apply to trusts and their distributions. However, the residence of the beneficiary is not always dispositive as to whether the distributions will be taxed under Minnesota law. Under the Minnesota resident trust rule, if the grantor resides in Minnesota when he or she creates an irrevocable trust, that trust will be subject to Minnesota tax law. It is important to note that some trusts are revocable when created but will become irrevocable later. The resident trust rule applies to those trusts that become irrevocable while the grantor is residing in Minnesota.
Beneficiaries also need to be aware of federal taxes. Federal taxes (as well as state taxes) could apply to tax distributions. If you receive distributions from your trust, you will likely need to pay federal taxes on those distributions. Special forms will be required for your federal income taxes.
We have extensive experience helping our clients understand their rights and responsibilities with regard to trusts and income taxes. Call us today at (320) 299-4249 and let us talk to you about your goals.