How is a trust taxed?
In Washington, a trust is taxed based on several factors. The most important factor is whether or not the trust is classified as a “simple trust” or a “complex trust.” A simple trust is one that distributes all of its income to its beneficiaries in the current year. It pays no federal income tax on its own income. A complex trust is one that retains income or accumulates it for future distributions. A complex trust pays federal income tax on any income it holds and that is not distributed to the beneficiaries. The taxation of a trust may also depend on the type of trust it is. For example, some charitable trusts are exempt from federal income tax. And some trusts can qualify for special tax treatment, such as qualified subchapter S trusts, which pay no federal income taxes. In addition to federal income tax, trusts are also subject to estate and gift taxes. For example, a trust with assets over the federal gift tax applicable exclusion amount may be subject to gift taxes. And a trust with assets over the federal estate tax exemption amount may be subject to estate taxes when it is created. Finally, Washington also levies its own taxes on trusts. This includes taxes on the income, property, and transfer of assets within a trust. It is important to understand the taxation laws in your state when creating a trust to ensure that you are compliant with all applicable taxes.
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