What are the Tax Benefits of Trusts?

Many different types of trusts offer the benefit of some sort of tax break. The exact nature of the tax benefits of trusts will depend on the way that the trust is structured, and how funds are disbursed from the trust. There are many ways in which using this type of estate planning tool can be beneficial over the long term.

In many cases, one of the main tax benefits of trusts is that the beneficiary is not subject to a large amount of inheritance taxes. While laws vary from one country to the other, it is highly unusual for the beneficiary to owe any type of inheritance tax on funds that he or she has yet receive in full. If the terms of the trust dictate that the beneficiary receives funds from the trust incrementally, then taxes are not assessed until those funds are actually in the hands of the beneficiary. At that point, they become taxable, just like many other types of income.

Assuming that the trust is structured in a manner that allows it to generate income over the long-term, this means that the beneficiary must only pay taxes on the funds received during the tax year. Even then, there may be some exceptions. In some countries, one of the tax benefits of trusts where the beneficiary is a student is that any withdrawals from the trust that are used to pay for schooling are exempted. While this is not a universal benefit, young people who are financing college educations with funds from family trusts would do well to determine if those funds are subject to taxes or are exempt.

Another of the main tax benefits of trusts is that the beneficiary does not have to pay taxes on any undistributed income generated during the tax year. Undistributed income is usually defined as any income generated by the assets held in the trust. If any taxes are due on undistributed income, the administrator of the trust is responsible for paying those taxes, usually from the remaining undistributed income. This benefit simplifies the tax filing for the beneficiary, and also eliminates the need to be concerned about the status of any undistributed income.

The tax benefits of trusts vary from one country to another, but often include some sort of tax exemptions that make it possible for the beneficiary to avoid paying inheritance taxes, as well as offering some sort of tax breaks on monies received for specific purposes. In order to know exactly which benefits are connected with a specific type of trust, it is important to seek legal counsel. A competent attorney can offer advice on the best way to structure wills and trusts so that beneficiaries gain optimum financial advantage from the trust arrangement, while still complying with all applicable tax laws.