What are the tax implications of a trust in Frisco, Texas?

A trust is an important part of estate planning that addresses property transfers when you die. One common belief is that trusts are only for the wealthy or exist as allowances for your heirs. However, anyone who owns assets or property, such as a house, can create a trust. Setting up a trust can provide for a disabled heir or allow your property to go to your children. Another reason to create a trust is to offer protection against creditors and lawsuits. A trust can also offer protection from taxes, and should be part of your considerations during estate planning.

What Are the State Tax Implications of Trusts in Frisco, Texas?

Texas does not generally tax trust income. However, an exception to the rule is the franchise tax, also known as a margin tax. The state considers trusts taxable entities, along with corporations, limited liability companies, and partnerships. When a franchise tax applies, the amount is 0.7% of the gross income on transactions and other business occurring in Texas.

Exceptions to the margin tax in Texas are passive entities and grantor trusts. Passive entities are non-business trusts with 90% of their income in passive sources and no more than 10% in business income. A trust must satisfy this test every year to remain designated as passive for tax purposes.

Grantor trusts may be excluded from the Texas franchise tax if they are grantor trusts for federal tax purposes, the beneficiaries are people or non-profits, and the trust is not a business trust.

Tax Implications for the Grantor/Settlor

Grantor or settlor trusts in Texas have incomes based on the person who started the trust, known as a grantor or settlor. When the grantor dies, the trust becomes a non-grantor or complex trust. These trusts pay their own income taxes. Anyone who sets up a trust for their heirs needs to consider these issues.

Tax Implications for the Beneficiaries

Assets or income that transfer to the beneficiaries from the trust are known as distributions. Distributions might include cash, real estate, stocks and other assets. Rental income from a property, for example, that beneficiaries receive is an example of a distribution.

Distributions from the trust principal are not usually taxable. When the trust generates income, the trust might have to pay taxes. These taxes are usually paid before the distributions.

When beneficiaries receive trust income, the tax situation become somewhat more complex. The beneficiaries often must pay taxes based on individual rates. This situation may lead to owing more in taxes than you anticipated.

However, beneficiaries have ways to reduce their tax liability. A Charitable Remainder Trust allows the income to go to a charity for a certain period, with the remaining assets going to the beneficiaries, Estate planning is essential to finding the best solution for your trust.

Tax Planning Strategies for Trusts in Frisco, Texas

Estate taxes can decimate your estate value without proper management. If you have a larger estate, you may have federal taxes to pay. These taxes can be reduced or eliminated with the right planning.

Taking full advantage of deductions and exemptions is one way to minimize your tax burden. Besides setting up trusts, other ways to reduce tax liability are charitable donations and taking the lifetime gift exemption.

Different assets, like investments, real estate, and retirement accounts, have different tax implications. A gifting strategy created with the help of a professional can ensure that everything goes smoothly for your heirs.

Specific Tax Considerations for Frisco, Texas Residents

Frisco is part of Collin County, with the Collin County Appraisal District setting tax rates. Understanding the impact of local property taxes and the Homestead Exemption on your property, if applicable, is a vital part of planning.

Establishing a trust in Frisco, Texas, requires careful planning and an appreciation of the outcome of your decisions. Being well-informed makes estate planning a smoother process. Consulting with an estate planning professional ensures that your trusts comply with the laws. The better informed your decisions, the more your heirs will benefit from the trust.

Do you need help with a trust in Frisco? Contact our office today!