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Minimize taxation of trusts

During 2014 a trust with taxable income above $12,150 will incur capital gains rate at 20 percent (15 percent plus a 5 percent surtax), whereas an individual will not pay the surtax until he or she acquires taxable income of $400,000. Also a trust will pay the Medicare tax of 3.8 percent on taxable income above $12,150, whereas an individual will pay that tax when their adjusted gross income exceeds $200,000. Therefore, a trust pays on capital gains on income above $12,150 at 23.8 percent, whereas if an individual has income under $200,000 then his or her rate on capital gains is 15 percent. Distributing capital gains from a trust (which has taxable income above $12,150) to an individual- beneficiary with AGI under $200,000 will obviously save tax dollars. In the right circumstances a certain amount of capital gains could be included as part of distributable net income and deducted at the trust level and be included in the beneficiary’s tax return with the use of certain provisions of the Pennsylvania Uniform Trust Act, the Pennsylvania Prudent Investor Act, and the Pennsylvania Uniform Principal and Income Act, in conjunction with US Treasury Regulations 1.643.

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