By: Barry E. Haimo, Esq.
May 18, 2015
Do You Need a Trust to Protect Your Assets from Taxes
HAIMO: Trusts are excellent vehicles for the reduction of the estate tax. Being as though the estate tax threshold changes periodically, it’s important to utilize these vehicles to maximize the amount of assets that you can remove from your estate for estate tax purposes. One of the best ways to do this is through a trust using various techniques.
Trusts are governed by Chapter 736 in the Florida Statutes and can help you to avoid probate, guardianship, and reduce taxes at death. Revocable and irrevocable trusts both have advantages, but there are many factors to consider before you decide which type of trust is best suited to your overall estate plan.
Understanding a Revocable or Living Trust
A revocable trust is a document that you create to manage your assets throughout your lifetime and also to distribute your remaining assets after your death. The trust is considered “revocable” because you can change or terminate it during your lifetime as long as you aren’t incapacitated.
Assets such as bank accounts, investments, and real estate must be transferred to the trust before your death in order to get the maximum benefits from it. If your assets aren’t properly transferred to the trust, they may be subject to probate or guardianship.
Do I have to pay taxes on a revocable trust? A revocable trust is generally ignored for federal income taxes during your lifetime. You will report the income and deductions directly on your personal income tax return.
Since the assets in your revocable trust are considered your assets for income tax purposes, they are also treated as your assets for asset protection purposes. In other words, a revocable trust does not protect your assets if you are sued by your creditors.
At the time of your death, all of the assets held in the trust are subject to federal estate taxes, and state inheritance laws.
Understanding an Irrevocable Trust
An irrevocable trust is a type of trust that generally cannot be changed or terminated once the trust agreement has been signed. Revocable trusts typically become irrevocable after the grantor’s death or a designated time.
Assets in an irrevocable trust can include, but are not limited to, businesses, investments, cash, and life insurance policies. Once your assets are transferred to an irrevocable trust, you no longer own the assets in the trust, thereby removing your unfettered rights to use and enjoy the assets. If you are trustee, you can still exercise a great degree of control of the assets though.
Do I have to pay taxes on an irrevocable trust? Irrevocable trusts can be structured so that any assets in the trust will not be subject to estate tax after the creator’s death.
What are the Benefits of Irrevocable Trusts?
Typically, irrevocable trusts are created for tax mitigation and avoidance as well as asset protection. Sometimes, these trusts are also utilized to solve issues caused by a complex family dynamic. In either case, these trusts must be both structured and administered properly to achieve your goals..
Creating a trust can help you accomplish your estate planning goals if you want to protect your assets from taxes or creditors. An estate planning attorney can help you with this complicated decision to determine what will be the best solution for your specific needs and situation.
Barry E. Haimo, Esq.
Strategic Planning With Purpose
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