Trusts remain fundamental tools in estate planning and establishing the correct terms, with the help of a knowledgeable attorney, is critical for compliance with wealth transfer rules and achieving intended goals. However, setting up the trust is merely the initial step in its lifecycle.

Ongoing vigilance is essential, as trustees must operate within their designated powers and be fully aware of their fiduciary responsibilities, such as distributing income according to trust provisions and ensuring they act in good faith when making decisions that affect the trust income. With new tax regulations expected, trustees must stay informed to manage these complex responsibilities effectively.

The following procedures should be observed throughout the year, with a thorough review and proper implementation particularly emphasized during the last quarter:

• If trusts require additional funding to cover trust payments, such as life insurance premiums, the trustee must ensure the proper flow of the funds: from the grantor to the trust and then to the third party, rather than directly from the grantor to the third party. Ordering rules are essential to the direction of the cash movement.
• For trusts with beneficiaries who possess so-called “Crummey powers,” the trustees must ensure the timely issuance of the Crummey letters in accordance with the trust provisions.
• Additional consideration should also be given to the flow of funds when the trusts are members of flow-through entities, such as partnerships or S corporations. Any capital calls or distributions to or from these entities should be executed through the trust’s bank account, not the grantor’s personal accounts.

Regarding year-end tax planning, the following resources have withstood the test of time: tax-loss harvesting, taking the required minimum distribution (RMD) from a tax-deferred account or satisfying the required minimum distribution through a qualified charitable deduction.

Taxpayers have a clearer picture of their annual income as the year draws to a close. This period is optimal for taxpayers to consult with their tax advisors to identify assets that could be sold at a loss to offset some of the gains throughout the year, a strategy known as tax-loss harvesting. In any case, it is imperative to review the suitability of any investment decision with your financial advisor prior to taking a purchase or sale action.

Those subject to taking (RMDs) from their retirement accounts due to reaching the “applicable age” can optimize the distribution by waiting for capital markets to reach a high point since any gains from the sale would be tax-sheltered. The applicable age is 72, unless an individual had not attained age 72 by Dec. 31, 2022, in which case the applicable age is 73.

For charitably inclined taxpayers, the RMD can be satisfied by contributing the amount needed directly to a qualified not-for-profit organization. The amount cannot exceed $100,000 in 2023, $105,000 in 2024 or $108,000 (projected) in 2025. Although taxpayers cannot claim the contribution as a charitable deduction, they can exclude the RMD from income — a more valuable benefit. This planning technique is particularly useful when the taxpayer's distribution is a significant, fully taxable amount (from an IRA or 401(k) account) and the taxpayer is in a high tax bracket.

For instance, a taxpayer required to take a $105,000 RMD in a 37% tax bracket can exclude the entire distribution amount from income by electing to make a qualified charitable distribution (QCD) to a charitable organization, thereby saving $38,850 in taxes.

Due to 2024 adjusted gross income limitations ($161,000 for single filers or $240,000 for married filers), certain taxpayers are ineligible to contribute to a Roth account.

To benefit most from this strategy, the taxpayer would need to be eligible to make after-tax contributions to their 401(k) or other workplace retirement plan. This step would be immediately followed by a conversion to a Roth IRA or Roth 401(k).

Taxpayers, however, must distinguish between after-tax 401(k) contributions and Roth 401(k) contributions, as different rules govern these respective plans. If allowed in the workplace, the after-tax 401(k) contribution can enable the taxpayer to save in their retirement plan beyond the traditional annual contribution for 2024 of $23,000, up to $69,000 ($76,500 for taxpayers 50 and older).

If the after-tax contributions are immediately rolled over to a Roth plan, the taxpayer would only be taxed on the earnings accrued for the days between the original contribution and rollover, which are typically minimal or may even be negative if the market declined.

The primary drawback to this planning strategy is that the taxpayer must be very scrupulous in keeping track of these rollovers, which will constitute the “basis,” file Form 8606 every year and keep in mind that upon withdrawal, only the basis can be withdrawn tax-free, whereas the accumulated earnings associated with the basis would remain taxable.

Start the clock running on your incentive stock option capital gain treatment but be aware of alternative minimum tax implications.

Incentive stock options (ISOs) offer more favorable tax treatment than restricted stock units (RSUs) or non-qualified stock options (NSOs). Once vested, ISOs grant the owner the right to purchase shares at a predetermined price without obligating the owner to exercise the option.

Exercising the option translates into buying the option at the exercise price. For AMT purposes, the difference between the exercise price and the fair market value at the time constitutes income. For example, if a holder has the right to buy stock Z for $2 per share but the share currently trades at $7 per share, the difference of $5 per share multiplied by the number of shares purchased will constitute income for AMT purposes.

From this point of view, it is generally recommended that this transaction happen as early in the year as possible, as AMT would not be due until April of next year. If AMT is owed as a result of the transaction, the taxpayer can receive a credit for the AMT taxes paid. The credit can be carried forward indefinitely until the taxpayer’s regular taxes are higher than AMT taxes (the taxpayer is no longer in an AMT position), at which time this credit can be absorbed.

Various tax planning strategies can be employed in reference to ISOs, depending on market conditions. For instance, if the share price should drop below the amount paid at exercise by the end of the year, then a short capital loss would be incurred that can be used a tax loss harvest technique mentioned earlier. In this case, AMT would be avoided.

Once held for the prescribed period, the shares acquired through ISOs are eligible for long-term capital gains treatment upon sale, providing significant tax advantages.

Individuals often pursue diverse work opportunities across different states or decide to change their domicile for various personal reasons. The complexity increases when the individual maintains ties to the original state, such as an apartment or some other place of abode, personal belongings, ties to various organizations, etc.

An increasing number of states are starting to pursue residency issues as taxpayers deemed residents of a particular state are taxed on their entire income. In contrast, a nonresident would be taxed only on income sourced to that state.

When evaluating whether a taxpayer has established domicile in a different state, both quantitative and qualitative factors are considered, such as where the rest of the family resides, time spent in each location, voter and driver’s license registration, and physical location of near-and-dear items. Even when the taxpayer has established domicile in a different state, if business ties bring the taxpayer back to the original state where they continue to maintain a place of abode, they may still be deemed a ”statutory resident” if their presence in that state is more than 183 days.

The issue of statutory residence is particularly pertinent for taxpayers who purchase a secondary home in a different state. Accurate travel logs document the number of days spent in each location contemporaneously. Residency issues are complex and should be coordinated with a tax advisor.

Proactive and informed tax planning is essential for effectively managing trusts, estates and personal finances. Trustees must adhere to fiduciary responsibilities, ensuring proper income distribution and fund flows while staying updated on new tax regulations. That's why we're here.

Connectwith our tax team today to discover how we can assist you in 2025 and beyond.