DEAR GARDEN STATE TRUST COMPANY:
Can I use a trust to save on my income taxes?
—PINCHING MY PENNIES
As a general rule, trusts have limited potential for creating on income tax savings, so the general answer for family trusts is no. If you hear the phrase “tax-saving trust,” the reference is more likely to be to death taxes, not income taxes. For example, if a married couple uses a “two-trust estate plan,” they may be able to double the amount that stays within the family free of federal estate tax. Trusts typically distribute their income to beneficiaries, who pay income taxes on the distributions. If the trust retains income, it must pay fiduciary income taxes.
However, there are important income tax savings available with charitable trusts, so if you are philanthropically minded, this could be a good avenue to explore. Such a trust must be irrevocable in order to achieve tax benefits, which means that the commitment to charity will be permanent.
Garden State Trust Company