How Is Property Tax Calculated
You can determine the amount youll pay in property tax by multiplying your most recent home value assessment from MPAC with the residential rate set by your local municipality. In the province of Ontario, these are based on the following:
- The MPAC-provided assessment of your homes value. This is based on your homes characteristics such as the size of your lot, its overall condition, whether or not there have been structural changes or renovations, and whether or not it has a basement or pool. MPAC also takes into account the values of comparable properties in your neighbourhood.
- The Education Tax Rate, implemented by the province of Ontario, the proceeds of which are used to fund regional schools.
- The Residential Tax Rate, which is determined annually by a municipalitys city council.
How Does A Beneficiary Get Money From A Trust
Beneficiaries get moneyofficially known as distributionsfrom a trust in one of three basic ways:
- Outright distributions: receive the funds in a lump payment or two, with no restrictions
- Staggered distributions: receive the funds over a certain time period or at periodic intervals, often in a set sum each time or after a specific event, such as graduation from college, reaching the age of majority, becoming a parent
- Discretionary distributions: receive the funds in amounts and at times determined by the trustee often in accordance with the grantor’s instructions and stated wishes
How Irrevocable Trusts Work
There are three distinct components to consider:
First, understand how the trust operates
Among the questions to have answered:
- Are you a current or future beneficiary? That is, will you receive distributions of income or principal nowor later, when the current beneficiaries interest terminates?
- Who is the trustee? Does the trustee have authority over investments and distributions? Or, is there a third party whose authority on investments and/or distributions supersedes that of the trustee?
Next, determine the tax characteristics
As a beneficiary, there are several key things you will want to know:
Lastly, understand the distribution provisions
- Does the trustee have discretion under the trust agreement to distribute cash or other assets to the beneficiary, or are certain distributions mandatory? If you are the beneficiary of a trust that makes mandatory distributions, you likely will have a predictable income stream from that trustand can plan accordingly .Conversely, if the trustee has complete discretion over distribution timing and amounts, you may not have a predictable income stream, making planning more difficult.
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Example: How Capital Gains And Losses Affect The Trust Taxable Income And The Distribution To Beneficiaries
- So, for instance, if a trust has $100,000 of principal and earns $10,000 in taxable income + $2000 in capital gains allocated to the principal, then the total taxable income = $12,000
- But $2000 of that amount goes to the trust principal, so it is subtracted from taxable income to determine what remains to be distributed to beneficiaries.
- On the other hand, if the trust suffers a capital loss of $2000, then its taxable income = $8000, but the capital loss of $2000 is absorbed by the trust, so it must be added back to taxable income to equal the amount that will be distributed to beneficiaries.
The trust issues a Schedule K-1, Beneficiary’s Share of Income, Deductions, Credits, etc. of Form 1041, U.S. Income Tax Return for Estates and Trusts to each beneficiary, listing the beneficiary’s share of income and deductions. Only taxable income is listed tax-exempt income is omitted.
The purpose of DNI is to determine what part of a distribution to beneficiaries is taxable to the beneficiary and deductible by the trust. This is achieved by multiplying each type of income, such as rent or dividends, by the total amount distributed divided by the DNI. Capital gains or losses are generally allocated to corpus unless they are distributed to the beneficiaries.
If Total Distributions > DNI, then:
Distribution Deduction = DNI â Tax-Exempt Income â Expenses Allocable to Tax-Exempt Income
If DNI > Total Distributions, then:
Distribution Deduction = Total Distributions â .
Case Study: Trust Distribution Strategy
In this example, a widower with his own assets is also the beneficiary of several trusts that were funded upon the death of his spouse. Taken together, the accounts hold $25 million in investable assetsto which the widower has varying levels of access:
Withdrawal strategy:Minimize taxes
To minimize future transfer and income taxes to the extent possible, the widower worked with his advisors to implement a strategy for his spending, investing and gifting:
We can help
We understand that trusts can be complex, with many considerations to take into account. Your J.P. Morgan team, along with our Wealth Advisors, Wealth Strategists and Trust Officers, can work with you and your tax advisors to create a distribution strategy that both meets both your day-to-day spending needs and your longer-term estate plans.
1For the purposes of this discussion, we assume that the trust, grantor and beneficiaries are all U.S. entities or individuals. The outcomes may vary for foreign trusts, grantors and/or beneficiaries.
2The GST exemption is the same amount as the U.S. estate and gift tax exclusion: currently, $12.06 million and twice that for couples. However, these amounts are scheduled to be cut roughly in half when the current legislation expires at the end of 2025, unless Congress acts otherwise. In 2022, the GST tax rate is 40%.
4The GST Non-Exempt Trust is subject to the GST when distributed to a grandchild or more remote descendant.
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Revocable Trust Income Tax
A revocable trust is known as a grantor trust for tax purposes because the grantor retains ownership of the trust and of assets in the trust. Any income that trust assets earn will also qualify as income for the grantor and the grantor will need to report that income on their personal income tax return.
A strong estate plan starts with life insurance
The trust should still file Form 1041 if it earned taxable income. Form 1041 reports that there was trust income and attachments to the form allow the trustee to detail how much trust income is taxable for the grantor, where that income is from, and which tax deductions or tax credits may apply to the income. The information on Form 1041 and any of its attachments can then be used to help the grantor complete their tax return .
If any portion of the trust income was not taxable for the grantor, like if some income went to a different trust beneficiary, the trust should send that beneficiary a copy of Schedule K-1. The grantor does not need to receive Schedule K-1. Similarly, if the grantor has a joint trust with their spouse and they also file a joint tax return, trust income for the grantors spouse is also included on the personal tax return and neither receives Schedule K-1.
How Are Trusts Taxed Faqs
With the tax season fast approaching, you may have questions about how your trust is taxed, who is responsible for tax filings, or how trust income taxes get paid. This blog will answer some common questions you may have about the taxation of your trust.
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How Real Estate Values Impact Property Tax Policy
Municipalities with higher local real estate prices and larger populations tend to have lower property tax rates as there are more taxpayers funding the citys pot and floating their operating budget. For example, Toronto has long boasted the lowest tax rate in the province, given its population size and expensive home prices.Similarly, GTA cities and Richmond Hill, round out the lowest three with rates of 0.632908% and 0.659549% respectively, and have among the highest average home prices in the region at $1,352,869 and $1,441,035.
In contrast, the cities with the highest tax rates often have the lowest-priced real estate.
Another factor is the citys commercial-to-residential tax ratio in most municipalities, businesses pay at least double the amount of tax than homeowners, with the Canadian average at 2.73. Generally, a higher commercial property tax rate translates to a lower residential rate, and vice-versa a local council may opt to hike the latter if they feel their community needs to offer more competitive advantages to businesses.To learn more about how property taxes work in Ontario, check out our property tax FAQs for home buyers here.
Home prices are all average prices, except for Thunder Bay, where the benchmark price was used.
Home prices were for October 2021.
Property tax rates:
Property tax rates for 2021 were sourced from each municipalitys website.
How To File And Pay
A return must be filed for every estate and trust required to file federal Form 1041, U.S. Income Tax Return for Estates and Trusts. A return must also be filed for any Section 468B designated and qualified settlement funds are required to file a Federal Form 1120-SF, U.S. Income Tax Return for Settlement Funds, and:
- that earned or received more than $100 of Vermont income or
- that earned or received $1,000 or more in gross income from the sources listed under Vermont portion on Schedule E.
A return must also be filed for an Electing Small Business Trust required to file a Federal 1041. A filer may be entitled to certain state incentives or credits.
If the above requirements apply to you, then you must file Vermont Form FIT-161, Fiduciary Return of Income. It may be necessary to file more than one fiduciary return while the estate remains open and continues to receive income.
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Did You Move During The Pandemic Heres Why You Should Pay Attention
Your municipalitys tax rate is just one factor the second element is the most recent value assessment of your home, which is determined by the Municipal Property Assessment Corporation . The amount you actually pay in tax is calculated by multiplying your citys residential tax rate by this assessment value.
MPAC usually provides this assessment every four years, and 2020 was slated for the next update however, as part of COVID-19 tax relief efforts, theyve opted to freeze property value assessments at 2016 levels through the 2024 tax year, providing locals and newly-relocated homeowners a temporary reprieve.
However, as Ontario home prices saw unprecedented growth over the last year the benchmark home value for the province rose 19.7% between September 2020 and 2021, with the average property selling for more than $1 million in many local markets its important for homeowners to be aware of how their value assessments may change over the coming years.
Irrevocable Trusts: What Beneficiaries Need To Know To Optimize Their Resources
First and foremost, understand how taxes will impact the distributions you receivebefore theyre paid.
Alyssa Zebrowsky, Wealth Advisor
Trusts are commonly used wealth planning vehicles. Yet many beneficiaries dont anticipate how the structure of their trusts may impact their entire financial pictures, from what they spend and how they invest to meeting their expectations and making future plans.
Moreover, because trusts do not have to conform to a single structure, beneficiaries of multiple trusts may well want to think carefully about how, when and in what order they receive distributionsand if the distributions they receive might impact their non-trust resources.
The devils in the details
Irrevocable trust distributions can vary from being completely tax free to being taxable at the highest marginal tax rates, and in some cases, can be even higher. Therefore, understanding the tax implications is critically importantwhich is why we focus on irrevocable trusts in the discussion below. In contrast, distributions from revocable trusts are not taxable to the beneficiary.
Grantors, too, should examine whether or not the characteristics of the trust they have created are benefitingor likely to benefittheir heirs to the degree originally intended.
Your J.P. Morgan team, along with your estate planning attorney, can help you gather and assess the information you need. This article can help you get started1.
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Can A Trustee Remove A Beneficiary From A Trust
It depends. A grantor of a revocable trust can remove a beneficiary if they have explicitly retained authority to amend a revocable trust. Thus, if the trust is a revocable living trust, and the trustee is also the grantor , then the trustee can amend the trust at any time. Such amendments include adding or removing beneficiaries. Laws vary by state, but generally, the only way a trustee could remove a beneficiary is if the grantor of the trust gave them a power of appointmenta special provision in the trust agreement that explicitly allows them to make such a change.
If the trust is irrevocable, neither the grantor nor the trustee can remove a beneficiary unless the terms of the trust allow that to be done. Note that a revocable trust will automatically convert into an irrevocable one when the grantor dies. As the word “irrevocable” implies, the terms and features of the trust can’t be changedand that includes the named beneficiaries. So in most cases, a trustee cannot remove a beneficiary from an irrevocable trust.
Income Tax Challenges And Smart Planning For Irrevocable Trusts
Many new irrevocable trusts have come from the temporarily doubled gift, estate, and generation-skipping transfer tax exemption. Some of these are grantor trusts, but trusts that are non-grantor face income tax challenges. Comericas Lisa Featherngill and Melissa Linn share more about planning for those trusts.
The temporarily doubled gift, estate, and generation-skipping transfer tax exemption has resulted in the creation of many new irrevocable trusts. Some of these are grantor trusts, and thus the grantor continues to pay the income tax on the trust income. However, trusts that are non-grantor face income tax challenges. Planning for those trusts is the focus of this article.
In 2022, irrevocable trusts pay tax at the top tax bracket of 37% when undistributed taxable income is $13,450. Individual beneficiaries pay tax at the top tax bracket when taxable income is $539,900 for singles and $647,850 for married individuals filing jointly. Thus, there is a need for planning to determine whether to distribute income to a beneficiary to arbitrate the tax rates between the individual beneficiaries and the trust. There are several taxes at playnet investment income tax, ordinary income tax, capital gains and lossesas well as potential new tax legislation.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
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How Can We Avoid Capital Gains
Question: I am considering creating an Irrevocable Trust to protect my house and other assets, but I am concerned about creating a situation where my children will have to pay Capital Gains tax.
Answer: An Irrevocable Trust can offer the creator, often referred to as the grantor, lifetime control over his or her assets, without creating a capital gains issue so long as the trust is a Grantor Trust for income tax purposes. Certain provisions within the trust create grantor trust status allowing the grantor to maintain his or her tax exclusion if the house is sold during their lifetime and also providing the beneficiaries with a fully stepped up basis and therefore no capital gains tax due at the time of sale.
Do All Trusts Pay Income Taxes
It depends. A trust is a separate legal and taxable entity. Whether the trust pays its own taxes depends on whether the trust is a simple trust, a complex trust, or a grantor trust. Simple trusts and complex trusts pay their own income taxes. Grantor trusts do NOT pay their own taxes the grantor of the trust pays the taxes on a grantor trusts income.
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If A Pension Scheme Pays Into A Trust
When a pension scheme pays a taxable lump sum into a trust after the pension holder dies, the payment is taxed at 45%.
If youre a beneficiary and receive a payment funded by this lump sum, youll also be taxed.
The trust will tell you the amount you need to report – this will normally be more than the amount you actually receive.
Trust Tax Rates And Exemptions
Trusts pay taxes. A trust is a legal entity that holds money and assets for future distribution or management. For example, you might create a trust for your childrens college education, putting money into it which they can withdraw when they go to school. Or you might put the family home into a trust, creating a legal entity that will own the property potentially indefinitely to ensure that it will always stay in the family. The intersection of trusts and taxes can be complicated, but working with a financial advisor will clarify relevant issues so you can make good decisions.
There are three main kinds of trusts.
Simple Trust A simple trust is, as its name suggests, the most basic and the most common. It holds assets and distributes all of the income that it makes off those assets to the trusts beneficiaries. It does not distribute any of its principal.
Complex Trust A complex trust is generally defined as not a simple trust. A trust is generally considered complex if it distributes less than all of its earned income in a year if it distributes any of its principal or if it makes distributions to charities as well as named beneficiaries.
Grantor Trust A grantor trust is managed by the individual who established the trust. They exert a potentially high degree of control over the trusts assets depending on how the trust was established.
2021 Ordinary Income Trust Tax Rates
In 2021 the federal government taxes trust income at four levels:
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