Navigating the Trustee Tax Rate Increase: Protecting Wealth in Changing Times
31 May 2023
The Government’s Budget Day announcement took many by surprise with an increase of the trustee tax rate to 39%, paralleling the top individual marginal income tax rate effective from April 2024.
For estates, there are special provisions that mean any income they receive can be taxed as if it were the deceased’s income for twelve months post their death. Trusts set up for disabled people are also covered by these rules, meaning their trustee income will be treated as though it was from the disabled beneficiary themselves – even though the nature of this income will remain unchanged.
What’s the rationale behind the change?
The new law seeks to close a loophole in the tax system. Previously, high-earners could avoid paying the highest tax rate by using a trust. But now the law states that trusts must pay taxes at the same rate as people’s top personal income rate.
To illustrate our point, think of a couple who settle a trust with their income-generating assets. One earns $180k and one earns $70k, while the trust generates $40k taxable income. When the income is retained in the trust, it will be taxed at 39%. The Inland Revenue’s solution says to distribute the income to the lower<