Active Trustees Can Eliminate Net Investment Income Tax

What to Look For

When the Affordable Care Act (ACA) was signed into law, it contained a new net investment income tax (NIIT), with a 3.8% tax applicable to all unearned income for individuals with an income greater than $200,000 and couples with an income greater than $250,000. Among the types of passive income subject to the NIIT is any income from a flow-through entity where the owner is not active in that business. If you are a business owner that has transferred some ownership of your business to a trust for estate planning purposes, your active participation won’t carry over to the trust to allow it to avoid the NIIT.  

The Opportunity

Since flow-through income from an active business is exempt from the NIIT, the distinction between passive and “non-passive” income is important for taxpayers trying to reduce their tax exposure. When a business owner moves company ownership into an irrevocable trust for estate planning, the trust is considered inactive and will attract the NIIT, even while the owner is active. However, the law supports the idea that a trustee who is active in the business causes the trust to be considered an active owner allowing the trust to escape the tax. 

The Benefit

While the definition of “active” is unclear for trustees, the activities should be regular and continuous, though need not be full-time. This nuance can save the business owner a good deal of money. Since the 3.8% NIIT can significantly impact the trust’s tax liability, it is well worth your time to consult with your tax advisor to ensure that your trustees remain active in the business. 

For more information on Smith and Howard’s tax planning services, please contact Cas L. Pittman, CPA, at 404-874-6244 and or simply fill out our form below.