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Land Trust Taxes

A land trust is a legal arrangement between a grantor, who creates the trust, and a trustee, who manages the trust for those who will benefit from the trust, called the trust beneficiary(s).

Most land trusts are set up as revocable living trusts and are designed to hold real estate and real estate-related assets, such as developed and undeveloped land, mortgages, notes, and other assets related to ownership rights in real estate.

The Benefits of Holding Real Estate in a Land Trust

A land trust provides the grantor (who also funds the trust with his or her real estate) several benefits:

  • Since the trust is revocable, real estate you can be added or removed from the trust whenever you want while you are alive and able. In addition, the trust can be amended, restated, or revoked at any time.
  • As the grantor and beneficiary of your land trust, you retain control of the real estate in the trust through the power of direction over the trustee who manages the trust real estate. You can even act as the trustee yourself.
  • When you create a land trust, you can designate a successor trustee who will step in and manage the trust property when you or the trustee you originally chose becomes incapacitated or otherwise unable to manage the trust.
  • Any assets held in the trust when you pass away will avoid probate and can be transferred to the trust beneficiaries directly.

That said, the main benefit that a land trust provides to its grantor is privacy and anonymity. Firstly, a trust is a private arrangement and not a matter of public record. This means that the manner in which the trust assets are transferred to its beneficiaries is not open to public scrutiny.

Secondly, because a land trust does not have to be recorded with any state or federal agency, the ownership of the trust property can remain anonymous. This anonymity provides a barrier between you, the beneficiary of the trust property, and your creditors, who will find it extremely difficult to identify you as being the owner of said property.

How a Revocable Trust is Taxed?

As mentioned above, most land trusts are set up as revocable trusts. This is important to note because revocable trusts don't have to pay income taxes because the IRS considers them disregarded entities for income tax purposes.

In fact, though a revocable trust may have its own tax ID number, it doesn't need one, because it doesn't need to file a tax return. All of this means that when you transfer property in and out of a revocable living trust, no tax is triggered.

Furthermore, when the assets in your trust earn income, this income flows through to you. For example, if the trust owns stock and a dividend is paid, that dividend income must be reported on your personal income tax return.

How an Irrevocable Trust is Taxed?

The way a revocable trust is taxed is a simple matter because a revocable trust pays no income tax. However, a revocable trust can become irrevocable. For example, when the grantor of a revocable trust passes away, the trust can no longer be amended, restated, or revoked and, therefore, becomes irrevocable.

Furthermore, whenever you set up a trust as irrevocable from the start, you need to be aware that there may also be income taxes to worry about. This is because irrevocable trusts are not considered disregarded entities by the IRS. That means that an irrevocable trust must pay income taxes, and these income taxes can be quite substantial.

Irrevocable trusts require their own tax ID number, just like a corporation does when it is established. Furthermore, the trustees of an irrevocable trust must report the trust’ income on a separate income tax return (IRS Form 1041).

In addition, the way income is reported for an irrevocable trust can be very complex and you will most likely need the help of a qualified accountant. Having said that, an irrevocable trust often has no taxable income to report.

What's more, even if an irrevocable trust has income to report, since trust tax rates are quite high, the trustee will often distribute such income to the trust beneficiaries. This way, the trust itself will pay no income tax, but the recipient of that income will report it on his or her personal income tax return, where it will be taxed at their own personal income tax rate.

Summary

To summarize, revocable trusts do not pay income taxes, therefore how a revocable land trust is taxed is a non-issue. Irrevocable trusts, however, may have to pay income taxes, and given the complexity of how irrevocable trusts are taxed, you may want to hire a good accountant to help you sort out the income tax issues for your irrevocable land trust.

To learn about the taxation of land trusts in general, or for more specific information about how land trusts are taxed in Wyoming, please contact us to schedule a free consultation with an experienced Wyoming estate planning attorney.

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Have a business to worry about?

Probate is a court-supervised process for transferring assets after you pass away. Probate is usually necessary in Wyoming to transfer assets held by a decedent in his or her sole name at death worth more than $200,000. The process has several drawbacks primarily relating to delays, expenses and privacy. There exist several alternative techniques such as revocable trusts. Learn more about the probate process here.

A Power of Attorney is a legal document which allows someone to act for you. They quit being effective, though, when someone becomes incapacitated. In such cases a Durable Power of Attorney is needed. The Financial planning raises the concern of ensuring effective management of property and financial affairs after you become incapable of managing them. Durable Powers of Attorney provide a flexible and low-cost option for such situations. Lifetime financial planning tackles ensuring effective management of property and financial affairs after you become unable to do so.

Important events affecting a person's finances shouldn't be stopped because the person is unconscious or lacks the mental or physical capability of acting on his or her own. See inside for further information on Durable and Medical Power of Attorney forms.

Revocable Trusts are a popular tool and function as the foundation for most estate plans. ( Follow here for how Revocable and Irrevocable Trusts differ).

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Despite all this, a majority of Americans have failed to provide their family members such guidance. This lack of guidance means family will have an unnecessarily difficult time predicting their loved ones' medical wishes. Completing an Advanced Directive ahead of time helps minimize undue stress during already trying times. Being healthy is no excuse not to begin this important process.

Medicaid planning stems from the understanding end-of-life and long-term health care can be prohibitively expensive for even middle class families. Medicaid is a joint federal-state program which provides means based assistance for those who qualify. Standards differ by state, but generally factor in the income and assets available to pay for medical expenses. There exist strategies for legally making assets inaccessible through the estate planning process. This is generally done via an irrevocable medicaid trust which is a type of Wyoming asset protection trust.

Do you have minor children? If so, then considering planning ahead. Find our guide to choosing and approaching a suitable guardian.

Estate Planning & LLCs

Your LLC is a valuable component of an overall estate plan.  State and federal gift and estate tax exemptions are changing, and to keep your plan current an annual estate plan review is advisable. Learn more on our page about Wyoming LLCs.

Your LLC contemplates gifts of LLC units to other family members or to trusts that have been established for their benefit.  If you did not sign an annual retainer agreement, make sure you contact your attorney and/or CPA to assist you in accomplishing and properly documenting annual gifts.

Periodically an appraisal of the assets in your LLC and valuation of the LLC itself is necessary.  For gifts to be properly documented, appraisals of assets and valuations of LLC interests must be done at the time gifts are made.  Updating must also be done in the event of the death of a member.

Don't Procrastinate On Estate Planing

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Elder law is vitally important and we take this responsibility seriously. We have seen the damage caused by ignoring the many nuances and pitfalls which make elder law unique. We cannot sufficiently stress the importance of choosing a competent adviser to protect your interests. Following this vain, we are proud members of the Wyoming Elder Law Counsel. This distinction sets us apart from other elder law attorneys. Elderly law often requires advance planning due to legal waiting periods before tax strategies can be fully implemented. It is best to deal with the topic sooner, rather than later, so everything is in place when you, a family member, or other loved one passes away. Passing away without a will can lead to unnecessary anguish and taxes during an already difficult time. You should always consult an attorney when creating your estate plan.



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