Can a Trust Help Me Reduce Taxes?
If you have a high-value estate, one of the main considerations of your estate planning might be what you can do to reduce your potential estate tax liability.
Trusts can be used in certain ways to help you reduce taxes, but not all trusts will have tax-reducing benefits. Here is a quick overview of a few types of trusts you can employ to reduce or eliminate your estate tax responsibilities.
First and foremost, we should mention standard irrevocable trusts, as they are the most commonly used type of trust to reduce estate tax liability. With these trusts, you place assets into the trust and give up ownership of them. The trust then becomes the owner and holder of those assets for the benefit of your chosen beneficiaries. Because you are no longer the owner of the assets, the value of those assets no longer applies to your estate.
The disadvantage is that these trusts can be inflexible, as the name applies. You cannot revoke the trust or change any of the terms without the express permission of beneficiaries. But they are very effective at helping reduce the value of your estate if you are certain of how you want to distribute your assets.
QPRTs are commonly used by homeowners to completely remove the value of a personal residence from the estate’s total value. Because your home is most likely to be the most valuable asset in your possession, this can cut out a significant portion of your net worth, especially if you have an expensive home.
With a QPRT you transfer your home from your name to the trust’s, and the home remains in that trust for a certain amount of time, after which ownership passes to your chosen beneficiaries. If you pass away before the expiration of the trust, the residence goes back to your estate. You are allowed to live in your house while the trust is in effect. Depending on how the trust is structured, when it expires you will either need to move or rent from your beneficiaries.
This specific type of irrevocable trust reduces the value of life insurance death benefits. If you have permanent life insurance, transferring it into this type of trust could reduce the value of your estate by a significant amount—seven figures or more, depending on your policy value. Once the policy is in the trust, the trust becomes the beneficiary of death benefits paid by the policy, which then get distributed to your chosen beneficiaries. You just need to live three years after the transfer for the benefits to not be included in your estate.
Charitable remainder trusts are frequently used for appreciated assets, because they help to avoid capital gains taxes and estate taxes alike. If you have real estate, stocks, mutual funds, or other assets with appreciating value that have been in your portfolio for some time, using a CRT can be a good idea. This transfers the asset into an irrevocable trust and sells that asset at fair market value, the proceeds of which can be used to give you income during your lifetime, and the remaining trust principal gets donated to a charity of your choice upon your death.
Selecting the Right Trust
We help our clients determine the most appropriate trust for their estate plan. For more information about reducing estate tax burdens with trusts, contact an experienced estate planning lawyer at Baker Law Group, P.C.
We offer an initial free consultation. To schedule, call our office, send an email, or complete our online form.
Baker Law Group P.C.
Hingham – Brockton – Holliston – Plymouth