As with the famous and diets, myths abound in estate planning and probate too.  We’ve compiled our TOP TWELVE LIST that we are sharing in five installments.

Myth #5:  Trusts always pay high taxes.  This is a partial truth.  Income retained in a trust is taxed at unfavorable tax rates compared to most individual tax rates.  The operative word is “retained.”  If the income is distributed out of a trust, the trust pays no taxes.  The recipient of the income pays taxes at their own individual tax rate.  Almost all trusts should be operated to routinely distribute their income or to be invested to avoid income and generate only capital gains.

Myth #6:  Trusts Avoid Taxes.   The Internal Revenue Code taxes income.  Almost all income.  Income is taxed regardless whether it is earned by an individual, a company, or a trust.  Trusts pay taxes on undistributed income.  No exceptions.

Myth #7:  I will pay taxes on my inheritance.  Here is the best thing about being the recipient of a gift by inheritance or otherwise:  You pay no taxes on the gift.  Not quite an exception to this are tax deferred accounts (IRAs, 401(k)s, and 403(b)s).  You do not pay tax by merely receiving these type of tax deferred accounts, but the money you draw out is taxable as ordinary income just the same as if the original account owner withdrew the money.  In most cases, a beneficiary other than a spouse has ten years to withdraw the funds so that the taxes do not hit in any single tax year.

Final Thoughts

Estate planning and probate should not be overwhelming—but they do require accurate information and thoughtful planning.

Taking the time to understand the facts can help you:

  • Protect your family
  • Avoid unnecessary complications
  • Ensure your wishes are honored

Have Questions About Your Estate Plan?

Every family’s situation is different. If you’re unsure where to start—or want to make sure your current plan is on the right track—speaking with an experienced attorney at Pyke Balen & Moncure, P.C. can make all the difference.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, specific tax, legal or accounting advice. We can only give specific advice upon consulting directly with you and reviewing your exact situation.