Preservation | Family Wealth Protection & Planning

Similar to individuals, trusts normally pay federal and state income taxes. In 2018, the highest federal rate of 37 percent only applies to single individuals if they have more than $500,000 of income and to married couples filing jointly if they have more than $600,000 of income. However, a trust will be in the highest federal tax bracket if it has more than $12,500 of income. (The maximum long-term capital gains and qualified dividends rate is now 20 percent for trusts with more than $12,700 of income.)

As discussed in an earlier post, trusts and estates may be subject to a 3.8 percent tax on net investment income over certain threshold amounts. Net investment income may include trade or business income from passive activities — those in which the taxpayer does not “materially participate,” according to Section 469 of the code. So, the determination of whether a trust or trustee materially participates may decide whether the income is passive, and consequently, subject to the net investment income tax, or NIIT. 

To help fund the Affordable Care Act, a 3.8 percent net investment income tax took effect in 2013. The tax, known as the NIIT, is imposed against individuals, trusts and estates on non-business income from interest, dividends, annuities, royalties, rents and capital gains above certain thresholds.