“A moderately wealthy retiree who’s put their savings into a revocable living trust for probate avoidance wouldn’t be subject to the compressed MAGI thresholds … and is not likely to see a tax increase due to the surtax,” said Tara Thompson Popernik, director of research, Wealth Strategies Group at Bernstein Private Wealth Management, New York.
To avoid the surtax when and if it’s incurred, she said, a trustee may opt to distribute the trust’s distributable net income (DNI) out to the trust’s beneficiaries, so that the DNI is taxed at the beneficiary level under the $10 million/$25 million MAGI thresholds.
“Trustees should weigh the advantage of distributing income to beneficiaries, with the benefits of retaining the income in the trust for future growth potentially outside of the beneficiaries’ estates,” Alcala said. “Distributions within the first 65 days of the year can be treated as being made in the prior tax year.”
“Smaller trusts could be divided into multiple trusts so that each has less than $200,000 of income, but it’s possible the IRS will try to aggregate trusts that are divided for that purpose,” said David Handler, partner in trusts and estates at Kirkland & Ellis, Chicago. “Or the trustee could plan to distribute income to the beneficiaries to keep the trust’s net income under $200,000.”
Assets and thresholds are key. For example, REIT investments tend to generate a higher yield than many other asset classes.
Added Dan Sudit, partner at Crewe Advisors, Salt Lake City, “Imagine a trust that has 200,000 shares of Apple stock, currently worth around $180 a share. The value of the trust is $36 million. Apple currently pays 88 cents of annual dividends per share. That would be $176,000. Assuming that’s the only income generated in the trust,” he said, “it would fall below the surcharge threshold.”