Do Trust Accounts Have Tax Deferral Benefits?

Trusts are considered persons for federal tax purposes and are therefore subject to taxation the same way an individual would be. However, income of the trust that is distributed to a beneficiary is not taxed to the trust. These distributions are taken as a deduction on the trust's annual 1041 Trust Tax Return.



Distributions from the net income of a trust are taxed as ordinary income to the beneficiary receiving the income. This taxation of the income at the beneficiary level makes sense because of the deduction that was taken by the trust for the distribution.

A trust that complies with the requirements of the Internal Revenue Code rarely results in a tax deferral benefits, but may shift the burden of paying income tax from a high-income earning individual to a lower-income individual and therefore result in tax savings.

If a trust account earns significant income and distributed that income to multiple beneficiaries with no other income, the effective tax rate paid on the entire sum ends up being much lower. The trust's distribution of income does not result in tax deferral because the tax is still paid, but it does result in significant tax savings.

The IRS has seen an increasing number of abusive tax shelter trusts in recent years. The form of these tax deferral trust accounts is usually for one trust to deduct a large amount of expenses for management and investments and then pay the remaining income to a second trust a beneficiary and deduct the entire amount.

Although trust accounts do not often result in income tax deferral, they do play a large and significant role in estate planning and helping individuals reduce the burden of the estate tax. A properly executed estate plan often uses simple and complex trusts to significantly reduce the estate taxes.

For more information on the tax benefits of trusts consult with a professional estate-planning attorney like Cheadle Law at 949.553.1066.