How to add trust accounts

If you would like to add a trust account to a plan, the most important thing to know is whether the trust is revocable or irrevocable. This is not always clear from the name of the trust. However, most trusts created for everyday estate planning purposes are revocable. From a tax perspective, revocable trusts are taxed as if the trust assets were owned by an individual (or couple). Therefore, you can add revocable trusts in Income Lab as investment accounts with the account type set to "Taxable" and set as the owner as one or both clients in the plan. Then enter the cost basis and the asset allocation.

If you would like to specify how distributions should be made from this account, you can add distribution settings to the account.

Irrevocable Trusts

The taxation of irrevocable trusts can be quite complex. Income Lab does not model trust taxation. However, if the plan needs to include income from an irrevocable trust, such as a charitable remainder unitrust (CRUT) or charitable remainder annuity trust (CRAT), you have a few options:

1. Include the trust income as an 'Other Income' item.
2. Include the trust in the portfolio and include a distribution plan
3. Include the trust as an account that is not included in income calculations

The first option is to include estimated future trust income as an 'Other Income' item with tax treatment set to 'Investment Income'. This will allow you to specify the amounts and timing of this income, as well as its tax treatment.

The second option is to include the trust as an account in the portfolio and to specify a distribution plan. For example, a CRAT would use a dollar distribution plan and CRUT would use a percentage distribution plan.

The downside of this approach is that passive income in the trust will be included in the clients' estimated taxes. This would be acceptable for certain intentionally defective trusts, but if this would lead to unacceptable overestimation of taxes, there is a third, more involved option.

To show the irrevocable trust in Life Hub, but not have passive income affect tax estimates:

1. Creating the trust investment account with a distribution plan as outlined above
2. Note the dollar amounts of the distributions you have planned
3. Uncheck the "Include account in income plan calculations" box
4. Add an 'Other Income' item to add the trust distributions back into the plan

For example, for this CRAT's $10,000/year distributions to the plan, we would add those $10,000/year dollar-based distributions to the investment account as a distribution plan, but also include an 'Other Income' item for $10,000/year in not-adjusted-for-inflation income.