How Dissolving a Trust Affects Taxes

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Setting up a trust can be an effective method of estate planning and it can help you minimize the impact of taxes on you and your beneficiaries. After setting up a trust, you could potentially dissolve it and take back all of the assets inside of it. When you take this step, you must consider the tax implications of doing so.

Dissolving the Trust

  • A trust is a type of legal entity that you can create to hold assets. It can own property, real estate, securities and other items. If you dissolve the trust, any of the property that was in it will become your property again. For example, if you previously transferred ownership of a piece of real estate into a trust, you would then have to transfer ownership of the property back to your own name once the trust is dissolved.

Estate Taxes

  • Some people use an irrevocable trust to help their beneficiaries avoid estate taxes. For example, by using an irrevocable trust, all of the property you put into the trust can be removed from your estate. This can help the size of your estate get down below the estate tax exemption and help your beneficiaries avoid estate taxes. If you use this strategy and then dissolve the trust, it could impact the estate taxes for your beneficiaries. It could significantly lower the total amount of property that your beneficiaries are able to inherit.

Personal Taxes

  • Some people use irrevocable trusts as a way to get out of paying personal taxes on income producing assets. For example, if you had a large amount of income coming in from securities like stocks and bonds, you could put them into an irrevocable trust and then allow your trust to start earning money. You would file a tax return for your trust instead of adding that money to your annual income. If you dissolve the trust, the assets will go back into your name and you will have to start including them on your tax filing again.

Considerations

  • If you create a traditional revocable trust, it should not affect your tax situation as the assets are still considered to be yours. If you create an irrevocable trust, you can change your tax status, but dissolving it may be difficult. In many cases, you have to get the beneficiaries of the irrevocable trust to revoke or dissolve it. This takes the responsibility out of your hands and puts it into someone else's hands.

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