I am tasked with setting up a trust or trust-like instrument for a relative. The bulk of the funds will be held about 15 years, until the beneficiary reaches a normal retirement age. The funds can be held in trust, but the tax rates are really unfavorable should the trust realize gains.
2018 Estate and Trust Income Tax Rates:
- Not over $2,550 10% of taxable income
- Over $2,550 but not over $9,150 $255 plus 24% of the excess over $2,550
- Over $9,150 but not over $12,500 $1,839 plus 35% of the excess over $9,150
- Over $12,500 $3,011.50 plus 37% of the excess over $12,500
The trust will be funded with an inheritance, so basis is not a problem. But the earnings will face the above high tax rates. Part of the inheritance available is in the form of an IRA. If gifted directly to the recipient, the lower personal rates would apply.
So the question is: is there any way to hold earnings away from misuse by a beneficiary, yet pass through the earnings for taxation at the more favorable personal tax rates?