When it comes to planning your estate, there are many different routes you can take according to what is appropriate for your own unique situation. In situations regarding high net worth clients, estate taxes are a sore topic for most, but the careful use of trusts in your estate plan can minimize the burden. Trusts can be a valuable tool to ensure your final requests are carried out and can help you lower estate taxes, protect your family, and minimize probate.
The living, or sometimes called revocable trust is perhaps the most fundamental when it comes to estate planning. It is created during your lifetime to hold ownership of your assets and contains distribution requirements at your death. Anything in the trust is not subject to probate, and all of the assets held by the trust are taxed to the owner as ordinary income. The beneficiaries, trustees, and distributions can be changed throughout the grantor’s lifetime. When properly funded, this type of trust also maximizes the use of each spouse’s lifetime exemptions for state estate tax purposes.
Irrevocable Trusts are another form of trust that can be established that, once setup, the grantor cannot change. This type of trust is used by higher net worth clients that may be facing an estate tax liability. By giving up control of the assets in the trust, they are considered to be out of the individual’s estate. Typically, clients make annual gifts of up to the annual gifting exemption of $14,000 with assets that they believe will grow substantially.
It is important to note that any income that is produced by the assets in the irrevocable trust will be taxed at the trust tax rate, which is often higher than the individual tax rate. With that in mind, we typically see clients place non-income bearing assets into the irrevocable trust, such as a life insurance policy, or other hard assets. In this way, the trust is able to provide for immediate liquidity to cover the costs of settling the estate.
Another option when planning your estate is the use of charitable trusts. There are several different options available, but all of them allocate some portion of the money to a charity. For example, in a charitable remainder trust, a large amount of money is placed in the trust, providing an income tax deduction to the donor. The trust then pays out an annual income stream to the donor or their spouse. At the death of the donor, the remainder of the value of the trust is given to charity.
There are many variations of the types of trusts we mentioned above, and each trust has its’ own purpose, from reducing estate taxes, creating a family legacy, or successfully planning the sale of a business. If you haven’t reviewed your estate plan lately, now is a great time to do so, and ensure that it meets your needs, and minimizes taxes.