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Estates & Trusts

2015 Year End Planning for Trusts & Estates

By December 9, 2015No Comments

Trusts and Estates Planning for 2015

Tax Brackets

Tax Rate 2015 Taxable Income
15% $0 – $2,500
25% $2,501 – $5,900
28% $5,901 – $9,050
33% $9,051 – $12,300
39.6% $12,301 +

Federal Estate Tax Exemption

Estates of decedents who die during 2015 have a lifetime exclusion amount of $5,430,000.

Federal Gift Tax Exclusion

The annual exclusion for gifts remains at $14,000 per person for 2015. Direct payments for tuition and medical expenses are exempt from gift tax.

Capital Gains

The adjusted net capital gain of an estate or trust is taxed at the same rates that apply to individual taxpayers. Thus, for tax years beginning after 2012:

  • A 0% rate applies to adjusted net capital gain that, if it were ordinary income, would be subject to the 15% income tax rate;
  • A 15% rate applies to adjusted net capital gain that, if it were ordinary income, would be subject to the 25%, 28%, or 33% income tax rate;
  • A 20% rate applies to adjusted net capital gain that, if it were ordinary income, would be subject to the 39.6% income tax rate;

Investment Income Surtax

For tax years beginning after 2012, a 3.8% surtax applies to the lesser of (1) undistributed net investment income or (2) any excess of adjusted gross income over $12,300. Any given item of NII is included in the NII of either the trust/estate or its beneficiary. Distributed NII is NII to the beneficiary as indicated on Schedules K-1, and undistributed NII is NII to the estate or trust.

Methods to reduce Surtax Liability

The 3.8% surtax applies to income from a passive investment activity. To help reduce the amount of income subject to the surtax the following should be considered:

  •      For complex trusts, compare the tax with and without distributions to beneficiaries to determine whether the trust or individual is in the lower tax bracket
  •        Use like-kind exchanges to defer gains
  • Recognize losses to offset gains


Some strategies that can be used to accelerate or defer income and/or deductions are:

  •   Timing surrounding payment of state income taxes (be sure to review AMT and the impact on the beneficiary if the preference is distributed)
  • Timing surrounding payment of property taxes and other trust expenses
  • Revisiting the trust’s distribution strategy to see if more income can be passed out to beneficiaries taxed at a lower rate than the trust
  • Revisiting the ability to treat ordinary gains as income vs. principal

Estimated Tax Basics for Trusts and Estates

Generally, a fiduciary of an estate or trust must pay estimated tax if the estate or trust is expected to owe at least $1,000 in tax for the upcoming year and expect its withholding and credits to be less than either:

  • 90% of the current year tax, or
  • 100% of the prior year tax (110% of that amount if the estate or trust’s adjusted gross income (AGI) on that return is more than $150,000).

However, if a return was not filed for the previous year or that return did not cover a full 12 months, the trust must use 90% of current year tax.

Exceptions. Estimated tax payments are not required from:

  •      An estate of a domestic decedent or a domestic trust that had a full 12-month prior tax year and had no tax liability for that year;
  • An estate when exempt from making estimated tax payments during its first two years

If the estate or trust receives its income unevenly throughout the year, it may be able to lower or eliminate the amount of its required estimated tax payment for one or more periods by using the annualized income installment method. Annualization periods are 2/28, 4/30, 7/31 and 11/30.

Payment Due Dates:

  • 1st installment…………… April 18, 2016
  • 2nd installment…………. June 15, 2016
  • 3rd installment………….. Sept. 15, 2016
  • 4th installment………….. Jan. 16, 2017

The amounts to be paid on these dates using one of the three methods above are as follows:

                                    Q1                   Q2                   Q3                   Q4

Federal                        25%                 25%                 25%                 25%

California                    30%                 40%                 0%                   30%

Certain Payments of Estimated Tax Treated as Paid by Beneficiary

The fiduciary (or executor, for the final year of the estate) may elect to have any portion of its estimated tax payments treated as made by a beneficiary (and not as payments made by the estate or trust). Such an amount is treated as a payment by the beneficiary on their Form 1040.

Time for making election. The fiduciary must make the election on the Form 1041-T, Allocation of Estimated Tax Payments to Beneficiaries. The election must be filed on or before the 65th day after the close of the estate’s or trust’s tax year. For details, see section 643(g).

Trust Agreements

It is important to read the trust agreement when doing planning for trusts to see what the agreement says about income/principal distributions as well as life events. Some trusts specify that distributions should start when the beneficiary attains a certain age or a certain event occurs. If this is the case, it could have an effect on planning for the trust.

Tax planning for trusts and estates can be very complex. Please feel free to contact us with any questions you have at 858-558-9200.

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