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Taxes: An Estate & Trust Complete Guide

Taxes are one of the most critical aspects of financial planning, yet they’re often misunderstood. It’s a broad and complicated subject, so many people choose to avoid it altogether. That’s…


August 15, 2022

Written by John Wonneberger

Taxes are one of the most critical aspects of financial planning, yet they’re often misunderstood. It’s a broad and complicated subject, so many people choose to avoid it altogether. That’s why we’ll focus on one specific area here: estate and trust taxes.


Did you know there are different types of taxes that relate to estates and trusts? If you’re a business owner or just interested in expanding your knowledge in finances, understanding these tax concepts will help you plan for your estate and trust in the most tax-efficient way possible. 


This blog post will discuss 4 key concepts of estate and trust taxes: estate planning, estate income taxes, trust income taxes, and gift taxes. We’ll explain what each one is, how it works, and more. Keep reading, and by the end of this guide, you’ll know the fundamentals of estate and trust taxes.

Estate Planning

What Is It?

Estate planning refers to making a plan in advance for how your property will be managed and distributed after your death. It can be a simple will-based plan or a more complex arrangement that includes trusts, life insurance, and other assets. 


Regardless of the size or complexity of your estate, estate planning can help to ensure that your wishes are carried out and that your loved ones are taken care of. With proper planning, you can also minimize the amount of taxes owed.

How Does It Work?

The first step in estate planning is identifying your assets and determining what you want to do with them after you die. You’ll need to consider financial and non-financial assets, such as real estate, businesses, investments, life insurance policies, personal belongings, and debt. Once you have a clear picture of your assets, you can start thinking about who you want to inherit them to and in what proportions. 


You’ll need to decide how you want your estate to be managed after your death. This includes appointing an executor, who’ll be responsible for carrying out your wishes. You may also want to set up trusts to manage assets for beneficiaries who are minors or have special needs.  

Benefits Of Estate Planning

Estate planning can help you:


  • Save Money On Taxes: By transferring ownership of assets to your spouse or children, you can minimize estate taxes.
  • Avoid Probate: Probate is the legal process of distributing a person’s assets after they die. If you have a valid will, your assets can be distributed without probate, saving your loved ones time and money. 
  • Control What Happens To Your Assets: Without a plan, the state will distribute your assets according to laws of intestate succession. This process may not be in line with your wishes. 
  • Prepare For Incapacity: If you become incapacitated, estate planning can help ensure that your estate is managed how you want it to. You’re also appointing someone you want to make financial decisions on your behalf.


Estate Taxes

What Are They?

An estate tax is a levy on estates whose value exceeds a statutory exclusion limit. Only the amount above that threshold is liable to taxation. The federal government and numerous states impose these taxes on property transfers at death, but the laws vary significantly. The state where the deceased individual resided when they died imposes the estate tax.

How Do They Work?

The value of your estate is equal to adding up the fair market value of all your assets, including real estate, businesses, investments, life insurance policies, personal belongings, and debt. If the total value of your estate is above a certain amount (known as the exclusion amount), you’ll owe estate taxes. 


The federal exclusion amount for 2022 is $11.7 million per person. If you’re single and your estate is worth more than $11.7 million, you’ll owe estate taxes on the excess amount. In contrast, if you’re married, you and your spouse can each exclude up to $11.7 million, for a total exclusion of $23.4 million. 


Estate taxes are imposed at graduated rates, ranging from 18% to 39%. The exact rate depends on the value of your estate. 

Strategies To Reduce Your Estate Taxes

There are several strategies you can use to reduce your estate taxes, including:


  • Gift Giving: You can give gifts up to a certain amount each year during your lifetime without incurring any gift taxes. We’ll explore this option in more detail below. 
  • Life Insurance: You can use life insurance to create a large enough estate to take advantage of the federal exclusion amount, but that won’t be subject to estate taxes. 
  • Charitable Giving: Donating to charity is a great way to reduce your taxable estate while supporting a cause you care about. 
  • Estate Planning Trusts: Trusts can be used to transfer assets to beneficiaries while minimizing estate taxes. 


Trust Income Tax

What Is It?

Trust income taxes are imposed on the income of certain trusts. The tax is levied on the trust’s beneficiaries rather than on the trust itself. The basic principle is that the tax is imposed on the income distributed to the beneficiaries, including interest, dividends, and capital gains.


The tax rate depends on the beneficiary’s marginal tax rate. Trusts are also subject to estate taxes imposed on the value of the assets held in the trust.

How Does It Work?

When a person dies, they usually transfer their property to another person through their will. However, in some cases, the property may be held in trust for the benefit of someone else. If this is the case, then the trustee is responsible for managing the property and distributing its income to the beneficiaries.


Trust income taxes work in much the same way as regular income taxes. The trustee is responsible for paying any taxes owed on the trust income. Some special rules apply to trust income taxes. For example, if the beneficiaries are minors, then the trustee may be able to claim a special tax deduction for them.

Ways To Reduce Trust Income Taxes

There are a few ways to reduce the trust income tax you have to pay. One way is to distribute the trust income among multiple beneficiaries. This can help to reduce the overall tax burden, as each beneficiary will only be taxed on their share of the trust income. Another way to reduce your tax bill is to invest in assets exempt from trust income taxes, such as life insurance policies or annuities.

Gift Tax

What Is It?

You may not think about the tax implications when you give a gift. However, the IRS does have gift taxes in place to discourage people from gifting large sums of money. The gift tax is imposed on the donor, not on the recipient. However, if the donor does not pay the taxes, the recipient may be liable for them.

How Does It Work?

Gift tax rates vary depending on the size of the taxable gift and can range from 18% to 40%. If the value of the gift exceeds the annual gift tax exclusion, then the donor must pay taxes on the excess.


For 2022, the yearly exclusion is $16,000. These limits apply per recipient, so you may give multiple presents totaling up to $16,000 to various persons and avoid paying the gift tax. Additionally, the lifetime exclusion is the maximum amount you can give in your lifetime. This exclusion is $12.06 million in 2022, adjusted for inflation each year.

Gift Tax Exclusions

There are a few situations where gifts are not subject to gift taxes. These include:


  • Gifts to the donor’s spouse.
  • Gifts to a political organization.
  • Payments made to a person or an institution, such as a college, doctor, or hospital, for medical and educational expenses.
  • Donations to a charity cause.
  • Gifts that are less than $16,000 in value.

Strategies To Reduce Your Gift Taxes

Gift splitting is one way to reduce your gift tax. Being married allows you to double your gifts, as you and your spouse can each give $16,000 to a recipient. This strategy enables wealthy couples to give substantial annual gifts to children, grandchildren, and others. You can also take advantage of the annual exclusion by making multiple smaller gifts throughout the year rather than one large gift. This can help you stay within the exclusion limit and avoid paying gift taxes.

Nesso Tax – We Help You Design A Complete Financial Plan

At Nesso Tax, we understand the importance of taxes in financial planning. That’s why we offer complete tax services solutions in Connecticut that can help you take your financial plan to the next level.


Our specialists are highly informed and skilled in all parts of tax law, so you can be confident that you’re getting sound advice tailored to your specific case. We’ll collaborate with you to create a tax strategy that reduces your tax liability while maximizing your benefits.


Plus, we’re much more than simply another Connecticut tax management and coordination firm. We’re part of the Nesso Group, and our mission is to assist people and organizations to succeed in a variety of fields, including accounting, asset management, law, and many more. You’re not only obtaining expert tax assistance when you work with us; you’re also taking a step toward feeling more confident in your life decisions.



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