Inheritance in Trust or Outright: The Tax Drag: the facts

1. An inheritance left in a trust that keeps its income is taxed at the trust's compressed brackets: the top rate and the 3.8 percent surtax from $16,000 of income. Left outright, the same income is taxed at the heir's own rates on top of the heir's own income.
2. Example: $1,000,000 earning 4 percent. Kept in the trust, the $40,000 of yearly income costs $13,643 in tax and surtax; in the hands of a single heir with $80,000 of other income, $9,086. The trust pays $4,557 more a year.
3. Compounded over ten years with the after-tax income reinvested, the outright inheritance ends about $61,542 larger. That is the price of the trust's protection, in tax alone.
4. The drag disappears for an heir already in the top bracket: their rate is the trust's rate, and the trust's first $16,000 at lower rates makes it slightly cheaper.
5. A trust that distributes its income avoids the drag, because distributed income is taxed to the heir, but a trust that must distribute protects less. The distribute-or-retain tool prices that yearly choice.
6. What the trust buys is not in this number: protection from the heir's creditors, divorce, and own mistakes, control over timing, and a place for the money if the heir dies young. Those are the reasons trusts are used; the drag is what they cost.

Educational only, not investment, tax, or legal advice. Results are hypothetical estimates that vary with each use and over time and are not guaranteed accurate or complete. Using this tool creates no client relationship with Considerate Capital, and the site that linked here is not affiliated with it. By using it you agree to the tool terms.