When you’re setting up your estate plan, you may be considering adding a trust. In Wisconsin, you have a choice of five different trusts: revocable, irrevocable, testamentary, marital, and bypass trusts.
Each has its own purpose. But understanding generally how trusts are taxed can also help you plan for your and your family’s future. Keep reading to learn more about how Wisconsin trusts are taxed.
Does a Wisconsin trust pay tax or the beneficiary?
Most often, taxes are paid by the trust’s beneficiaries, if the beneficiary has received a distribution from the trust.
For example, if the trust has $10k in income and $3k is distributed to the beneficiary, then the beneficiary pays taxes on the $3k received while the trust pays taxes on the remaining $7k of income.
When administering the trust, it’s important to know when to make distributions to the beneficiary, as trusts are typically taxed at higher rates than individuals. Because of this, tax savings can be enjoyed by distributing trust assets to beneficiaries.
However, if the trust has less than $600 in income, then no tax is owed – by either the trust or the beneficiary.
Do I Have to File a Tax Return for My Wisconsin Trust?
The person managing the trust (the “trustee”) must file an income tax return for the trust. The tax return will reflect the trust’s gains and losses for the year.
However, there will often be a difference between the “taxable income” of the trust and its “taxable capital gains and losses.” In other words, if you have trust money invested in stocks, the gains and losses are realized (or taken into account) when the stock is sold.
Because of this, you may see a difference between your taxable income and the income reported on your trust’s financial statements.
With the complexity of trust financial reporting and taxes, it’s best to connect with a qualified Wisconsin trust lawyer so they can walk you through this process.
Do I Have to Pay Federal Estate Taxes With My Trust?
Most trusts do not protect your assets from state estate taxes. Fortunately, Wisconsin doesn’t have estate taxes. However, you will be subject to federal estate taxes if your estate is worth more than $12.06 million in 2022 (or a combined estate with your spouse of $24.12 million) and $12.92 million in 2023 (or a combined estate with your spouse of $25.84 million).
An exception to the above is the bypass trust, which “bypasses” federal estate taxes. This type of trust is usually used for married couples with substantial assets.
Trust and taxes can often seem daunting, but with an experienced Wisconsin estate planning attorney on your side, you can amply plan for your and your family’s future.
Setting Up a Trust in Southeastern WI
If you need a trust in Southeastern Wisconsin and the Milwaukee area, then you can count on the estate planning experts at Collins Law. We have years of experience planning estates, and we can help you navigate your options, including setting up a trust. Contact us for a free consultation today!