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Estate Taxes and Trusts | What You Need to Know
Estate Taxes and Trusts | What You Need to Know

Estate Taxes and Trusts | What You Need to Know

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The concept of trusts and estate taxes can be an uncomfortable and often complicated topic that most would rather avoid. It is, however, sometimes necessary to discuss these things for the betterment of our estate, reductions in taxes, and to ensure you have the utmost control over your accumulated wealth.

While a complicated topic, this article is going to do its best to shine some light on the benefits and processes of establishing a trust, as well as the taxes you are eligible to avoid in doing so. As always, it is recommended that you consult with a qualified tax consultant to determine which form of trust is suitable for you and if, indeed, you should pursue setting one up at all.

That said, let’s look at what establishing a trust for your estate can do for you:

What Taxes are My Estate Currently Subject to?

The biggest and most important tax your estate is currently subject to in the United States is called the Federal Estate Tax. Despite its name, however, only certain estates are subject to this sizable fee.

According to the CDPP, only 2 out of every 1,000 estates will owe this estate tax each year. This is due to the tax’s high exemption level, which jumped from $650,000 in 2001 to $5.49 million in recent years. Because of this, the estate tax is best explained as a “silver spoon” tax or one that only affects the most wealthy estates within the U.S.

Furthermore, estates eligible to pay in on this estate tax generally pay about one-sixth of their total net value in taxes. This tax is in place to ensure that wealthy taxpayers pay taxes on their unrealized assets or assets that have not or will not be sold.

The rate for this tax is separated into federal and state levels. Federally, the tax rate rests at 40%. The state-level varies from state to state, but 20% is the maximum any state can charge.

What is a Trust?

A trust is a fiduciary agreement that places certain assets from your estate in the hands of a third party known as a trustee. The trustee then holds these assets on behalf of a particular beneficiary or a set of beneficiaries.

The primary purpose is to both avoid that estate tax and establish a higher degree of control over the wealth you have accumulated. For example, trusts can usually avoid probate (officially proving a will’s validity), so the assets included in a given trust can pass much quicker from trustees to beneficiaries.

There are several types of trusts as well that must be considered in establishing your own. For example, there is a marital trust, which provides benefits to a surviving spouse; a “charitable lead” trust, which allows designated funds and/or assets to be distributed to one or multiple charities before the rest is given to other beneficiaries; a “generation-skipping” trust, which allows your assets to skip a generation to avoid being taxed upon the death of your children before being delivered to the grandchildren; and so many more.

However, despite the large number of trust types, most of them can be divided up into two separate categories: revocable and irrevocable.

  • Revocable: A revocable trust is precisely as it sounds. It allows you (the grantor) to maintain control of the assets in the trust throughout your lifetime and can be dissolved at any time and for any reason.

    This type of trust does become irrevocable upon the grantor’s death, though, and throughout your lifetime, is treated and taxed like any other asset you own.

  • Irrevocable: An irrevocable trust is a trust that can not be dissolved once it has been established. This type of trust helps your assets avoid taxes and probates by transferring the listed assets out of your estate, but this also means those assets are out of your control.

    If your goal is to decrease the amount of your estate subject to taxes, this is the trust you will want to utilize. Doing this may also protect the listed assets from legal judgments against you, as an irrevocable trust is designed to transfer certain items or funds out of your possession.

What are the Benefits of Establishing A Trust?

Establishing a trust can have many benefits. Naturally, assets in a trust can avoid the lengthy probate process to save time and money on court fees, but there are many more advantages than just that one:

  • Higher Control Over Wealth: The terms of a trust are highly customizable, allowing you exercise as much or as little control over your wealth as you’d like. You can establish things like who receives which asset and when and decide how assets are distributed in tricky situations like having children from multiple marriages.
  • Legacy Protection: A trust allows you to decide to who your assets are being distributed, allowing you to avoid giving money or property to those with little money management skills.
  • More privacy and less probate: Probate matters are public record, so having a trust that doesn’t go through probate allows for privacy and a decrease in court costs.

These are the primary benefits to having a trust established, but advantages can easily multiply depending on your specific situation.

Conclusion

As you begin to consider why and how you may want to set up a trust for your estate, many variables must be considered. For this reason, it is recommended that you consult a tax expert to determine whether a trust is necessary or right for you.

When hiring an expert, you should also be aware of the different kinds of tax professionals and their specialties so that you meet and consult with the one that is best for your situation.

At Borshoff Consulting, we perform financial and business consultations, as well as many other services that are established to help as you navigate the world of estates and trusts.

To inquire about how we can help you, please contact us! You can trust Indiana’s tax expert!

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