What Are The Tax Benefits of Forming A Living Trust?

A living trust allows you to place your assets in it while designating someone you trust to administer the proceeds upon your death. The designee is bound by the wishes stated in the trust agreement. While you are still fully capable, you have the benefit of adding to, subtracting from, or making any changes that you deem necessary or prudent.

Will Vs Living Trust:The Differences

Several benefits are derived from this legal document. The most notable is that it avoids probate, which is the bane of a will. One of the major differences between a will and a living trust is that everything in the will is stalled until your death. The living trust allows more flexibility while you are still alive, and the length of time it takes for heirs to take possession of the assets is considerably shorter. With a will, it can take months or even years, whereas a living trust could conceivably take weeks. After the trustee has taken care of any obligations on your behalf, the estate can be dispersed according to your wishes.

A living trust gives you the power to designate someone you trust to take over your financial affairs in the event of incapacitation. This is a valuable consideration, which is unique to a living trust because it does not require any court involvement. With a will, the court will appoint a conservator if you do not have a durable power of attorney. He or she will have to receive court approval of any property sale or other expenses related to the will. Of course, you can eliminate that possibility by drawing up a durable power of attorney before the need arises.

While a living trust may provide tax savings for married partners, it generally does not offer any more tax benefit than a will. The costs to settle the estate will be less because it is not subject to the probate process. Beneficiaries can almost immediately receive any revenue from income-producing investments without too much disruption.

Protecting Assets From Creditors. Revocable & Irrevocable Trusts

A properly structured trust may shield assets from creditors, but the net tax effect depends primarily on the structure of the trust – that is, whether it is a revocable or an irrevocable trust. The government charges an estate tax to convey property to another person after someone’s death. It is based on the assessed value of any property left by the decedent. A revocable trust gives the grantor the freedom to make changes in trustees or beneficiaries and add or remove assets at will. He or she can even eliminate the trust altogether. When the owner of a revocable trust expires, the assets are placed in the decedent’s estate and are taxed. Because the trust, rather than the grantor, owns the assets in an irrevocable trust, it does not owe taxes.

While the grantor is alive, he or she must pay taxes on any income generated from assets in a revocable trust, while income from an irrevocable trust must be included on the tax returns of the beneficiaries. In either a revocable or irrevocable trust, any capital gains taxes may be less because the capital gain is computed on the property at the time of the grantor’s death, which could be quite sometime before the property is actually sold. Since the amount of the gain may be less, the amount of tax owed on the gain will be less.

Grantor Trust

Another approach to possibly reducing taxes in a living trust is the grantor trust, whereby the grantor can use personal exemptions from the sale of a trust asset, like the $250,000 exemption from the sale of a primary residence. Both revocable and irrevocable trusts are grantor trusts, but the grantor of the irrevocable trust must maintain some control over assets in order to qualify. This can be accomplished by becoming a beneficiary of the trust.

Finally, a revocable trust does not have to pay gift taxes, but the irrevocable trust requires that gift taxes are to be paid when assets are moved into it. This does not preclude the estate taxes that will have to be paid in either case. To receive the most benefit in the reduction or avoidance of income and estate taxes, it is wise to seek the advice of a qualified attorney.

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No content from this article constitutes or takes the place of legal advice. Please contact one of our attorneys before making any decisions.

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