Orlando, FL estates & probate attorney Jim Flick discusses the tax implications of setting up a trust. He explains that when evaluating the tax implications of establishing a trust, both income tax and state/gift tax considerations must be addressed. A typical revocable living trust generally has no income tax consequences and does not achieve estate or gift tax savings. However, when implementing irrevocable trusts for estate tax reduction or asset protection, income, state, and gift tax issues must be carefully managed.

An irrevocable trust can be structured to be income tax neutral with careful planning, which is often advantageous. This is because irrevocable trusts reach the top federal income tax rate at very low levels—around $13,000 of taxable income—whereas a single individual would not reach that rate until approximately $250,000.

Additionally, for gift tax purposes, making a complete transfer to an irrevocable trust requires filing a gift tax return. In return, the transferred asset is removed from the estate at death, potentially allowing it to pass untaxed for multiple generations.