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Quick answer. Terminating a trust can carry significant income, estate, and gift tax consequences, especially for credit shelter trusts, marital deduction trusts, and GST-exempt trusts. Both the method of termination and the manner of distribution affect the tax result, so consult a tax expert before finalizing any termination involving tax planning.
Key takeaways
- Credit shelter, marital deduction, and GST-exempt trusts carry tax attributes that termination can alter.
- The method of termination, whether by agreement or judicial approval, can produce different tax results.
- How the terminated trust is distributed affects income, estate, and gift tax consequences.
Which trusts demand the most tax caution?
A credit shelter trust keeps assets out of the surviving spouse's taxable estate. A marital deduction trust qualifies property for the estate tax marital deduction. A GST-exempt trust holds a status that careful planning secured. Each serves a tax function, and the manner of its termination can preserve or destroy that function.
Does the method of termination change the tax result?
Yes. A trust may be terminated by agreement or by judicial approval, and these routes can produce different tax results. The income, estate, and gift tax consequences may turn on how the termination is accomplished, not merely on the fact that it occurs.
Does the distribution itself carry tax weight?
Yes. How the trust property is distributed, in what proportions, and to whom can generate income, estate, or gift tax consequences. A distribution that disregards the tax attributes of the assets or the tax positions of the recipients may impose burdens that thoughtful planning would have avoided.
Frequently asked questions
Should I consult a tax advisor before terminating a trust?
Yes, particularly for credit shelter, marital deduction, or GST-exempt trusts.
Does party agreement eliminate tax risk?
No. An agreement resolves what the parties want to do, not what the tax consequences will be.
Can the way a trust is distributed trigger gift tax?
It can. The manner of distribution affects income, estate, and gift tax outcomes.
About the author
Attorney Adrian Philip Thomas is a shareholder and founding partner of Adrian Philip Thomas, P.A., a boutique attorney law firm located in Fort Lauderdale, Florida. He has practiced law for the past 30 years, maintaining an office in Fort Lauderdale, Broward County, Florida. Mr. Thomas is "AV" rated by Martindale-Hubbell and has been selected on multiple occasions as one of Florida's Legal Elite by Florida Trend Magazine and selected as a Super Lawyer. Mr. Thomas concentrates his practice in estate and trust litigation, both prosecuting and defending, which includes matters involving estates, trusts, and probate. He represents clients with disputes throughout the State of Florida. Attorney Adrian Philip Thomas has a Master of Laws from the University of Miami, a Juris Doctor from Nova Southeastern University, and a Bachelor of Science from the University of Florida. Attorney Adrian Philip Thomas has lectured at continuing legal education seminars on various probate topics.
This article is general legal information about Florida law, not legal advice, and does not create an attorney-client relationship. Consult a Florida-licensed attorney about your specific situation.
