How is a trust taxed?
Trusts in Hawaii are subject to taxation by the state. Generally, any income or profits produced by the trust will be subject to taxation. This includes any money or assets from investments, real estate sales, or other sources. Depending on the type of trust, taxes may be paid directly from the trust or the trustee may be responsible for filing and paying taxes. A testamentary trust is taxed at the trust level. The trustee must file a return with the income, deductions, and credits and the trust is taxed at the highest tax rate. The trust must also disclose the income, fixed assets, and other investment activity. An irrevocable trust, however, is taxed differently. A good portion of the trust’s income will be taxed to the beneficiaries of the trust as if it were income directly paid to them. This is known as the “Throwback Rule.” The trustee must file a trust tax return to report the income, deductions, and credits from the trust. Any profits from the trust that is not distributed to the beneficiaries will be taxed to the trust and the trust will pay taxes on those profits. Trusts in Hawaii can also be subject to state taxes including income tax, gift taxes, and estate taxes. The beneficiary or the trust will need to pay these taxes depending on the type of trust and the state law where the trust was created. Regardless of the type of trust, taxes need to be paid so the state can receive its due.
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