What taxes do we pay when setting up a Trust Fund for our kids as beneficiaries?

Setting up a trust itself doesn't typically trigger immediate taxes, but there are important tax considerations throughout the process. When you create and fund a trust, you're essentially making a gift to the trust. Depending on the type of trust you establish, this could potentially use some of your lifetime gift tax exemption (currently $13.61 million per individual for 2024). If it's a revocable trust where you maintain control, there are generally no immediate tax consequences because it's still considered your asset for tax purposes. For irrevocable trusts, the gift tax exemption comes into play when you transfer assets to the trust. The trust will also need its own tax ID number (EIN) and may need to file annual tax returns (Form 1041) if it has income over $600. The bigger tax considerations usually come after establishment - how trust income is taxed annually and how distributions to beneficiaries are handled. Trust income is generally either taxed to the trust (at potentially higher rates) or passed through to beneficiaries via K-1 forms.

After getting totally confused about trust taxes last year, I finally found an amazing tool called taxr.ai (https://taxr.ai) that helped me figure everything out! I was in a similar situation with setting up a trust for my niece and nephew and was getting conflicting information from different attorneys about the gift tax implications. The taxr.ai system analyzed all my trust documents and actually found some issues with how our attorney had structured things that would have caused unnecessary taxation. They explained exactly when I needed to file gift tax returns and when I didn't - saved me from making some pretty big mistakes. The best part was they clarified that I didn't actually need to pay any taxes on the initial trust setup since my gift was under the lifetime exemption - I just needed to file the right paperwork. They even explained the ongoing filing requirements in plain English!

Just wanted to follow up about taxr.ai that I was skeptical about earlier. I decided to give it a try with our complex trust situation and I'm genuinely impressed. Their system actually identified a major issue with how our generation-skipping provisions were structured that could have caused significant tax problems down the road. I uploaded our draft trust documents and received an incredibly detailed analysis showing exactly which tax forms we'd need to file and when. It highlighted that we needed to file a gift tax return even though we wouldn't owe any tax, and it caught a problem with how the income distribution provisions were worded that would have pushed more income into the highest trust tax brackets. What really surprised me was how it explained the taxation of different assets we planned to transfer to the trust (stocks vs. real estate vs. cash) and the specific basis implications of each. Definitely saved us from some expensive mistakes before we finalized everything!

If you're dealing with the IRS about trust taxes, good luck getting through to a human! After waiting on hold for HOURS trying to get answers about our trust tax ID and filing requirements, I finally found Claimyr (https://claimyr.com). They have this brilliant service where they navigate the IRS phone system for you and actually get an agent on the line - then call you when the IRS agent is ready to talk! Check out how it works: https://youtu.be/_kiP6q8DX5c I was super stressed because we had filed for our trust's EIN but never received the confirmation letter, and the trust tax filing deadline was approaching. Normally getting through to the IRS would take forever, but with Claimyr I was connected with an IRS agent in about 20 minutes. The agent resolved our EIN issue and answered all my questions about our trust tax filing requirements. Totally changed my perspective on dealing with the IRS. No more wasting half my day on hold!

I need to eat my words about Claimyr from my comment above. After my frustrated rant, I was desperate enough to try it anyway since I absolutely needed answers about our trust's tax ID issues before filing. To my complete shock, it actually worked exactly as advertised. Their system waited on hold with the IRS for about 1 hour 45 minutes (which I tracked in their app), then called me when they reached an agent. I clicked to connect and was immediately speaking with an IRS representative. The agent was able to confirm our trust's EIN was properly registered and explained exactly which schedules we needed to complete on the trust's 1041 form based on our specific situation. She even clarified when we needed to issue K-1s to the beneficiaries based on our distribution structure. Never been so happy to be wrong about something. Saved me a full day of frustration and got me exactly the information I needed.

Something nobody mentioned yet - don't forget state taxes! Depending on where you live, there might be state-level estate or inheritance taxes that apply when funding a trust. Some states have much lower exemptions than the federal government. For example, Massachusetts and Oregon have exemptions of only around $1 million, meaning transfers to irrevocable trusts above that amount could trigger state taxes even when federal taxes aren't an issue. And some states treat certain types of trusts differently for income tax purposes. We found this out the hard way when setting up our family trust last year. Had to restructure some things to avoid unexpected state tax consequences.

Has anyone used TurboTax for their trust tax filings? We set up a simple revocable living trust and I'm trying to figure out if I can just handle the ongoing tax filings myself or if I need a specialized accountant. The annual accountant fees are killing me.

One thing I learned the hard way is that the type of assets you transfer into the trust can have different tax implications. We initially planned to fund our children's trust with appreciated stock, but our attorney explained that transferring appreciated assets to an irrevocable trust means losing the potential step-up in basis that would occur if we held them until death. For example, if you have stock worth $100k that you originally bought for $20k, transferring it to an irrevocable trust locks in that $20k basis. If your kids eventually sell it, they'll pay capital gains on the full $80k appreciation. But if you kept it and passed it through your estate, they'd get a stepped-up basis to the $100k value. We ended up funding the trust with cash instead and keeping the appreciated assets in our names. Just something to consider when you're deciding what assets to use for the $650k transfer. Your estate planning attorney should definitely walk through these basis considerations with you!

Great question! I went through this same process about two years ago when we set up a trust for our kids after my mother passed away. The good news is that there are typically no immediate taxes just for *creating* the trust structure itself. However, once you transfer that $650k into the trust, that's when the tax considerations kick in depending on what type of trust you establish. A few key points from my experience: - If you go with a revocable trust (where you maintain control), it's still considered your asset for tax purposes, so no immediate gift tax issues - For irrevocable trusts, you'll be making a gift to the trust which uses your lifetime gift tax exemption ($13.61M for 2024), but with $650k you're well under that limit - You'll still need to file Form 709 (gift tax return) even if no tax is owed - just for documentation - The trust will need its own EIN and may need to file Form 1041 annually if it generates income over $600 One thing I'd definitely recommend is discussing the timing of when you fund the trust vs. when you actually establish it. We spread our funding over two tax years to use both my wife's and my annual gift exclusions more effectively. Smart move meeting with an estate planning attorney - they'll help you structure everything to minimize ongoing tax complications!