Making long term decisions about what should happen to your assets and money after you are gone can be difficult. But putting these decisions in a legal document is critical to making sure your wishes are followed. You have several options when deciding what legal document to use to communicate your last wishes such as a will or trust. A trust functions differently than a will and has the opportunity to provide you and your heirs with tax savings. Below are examples of how to minimize tax with a trust.
What is a trust? A trust is a private document that provides instructions on how to distribute your assets and wealth after your death. A trust also allows you the opportunity to make your wishes known regarding healthcare decisions and how you would like your remains handled after death. Fidelity investments, a well known asset management company, describes the benefits of trusts stating,
“Control of your wealth. You can specify the terms of a trust precisely, controlling when and to whom distributions may be made. You may also, for example, set up a revocable trust so that the trust assets remain accessible to you during your lifetime while designating to whom the remaining assets will pass thereafter, even when there are complex situations such as children from more than one marriage.
Protection of your legacy. A properly constructed trust can help protect your estate from your heirs’ creditors or from beneficiaries who may not be adept at money management.
Privacy and probate savings. Probate is a matter of public record; a trust may allow assets to pass outside of probate and remain private, in addition to possibly reducing the amount lost to court fees and taxes in the process.”
A trust has many benefits that could make it the best tool for your long term estate planning. You will need to work with an experienced estate attorney such as those at Bredemann & Shellander, PLC to put together all pertinent information for your trust. Your individual circumstances and entire financial picture will determine which financial vehicles and tax savings strategies are best for you. Here are examples of different types of trusts and how they can help you minimize your estate tax burden.
Irrevocable Life Insurance Trust (ILIT): ILIT is a holding vehicle. You can put your life insurance policy in a trust, thereby removing it from your estate. You and your loved ones can still retain the benefits of the insurance policy after you die but you will no longer own the policy and the proceeds are not included in your estate. This an irrevocable trust and once you move the life insurance policy to the trust you cannot put the policy back in your name.
Charitable Remainder Trust (CRT): A charitable remainder trust allows you to donate to your favorite charity and earn some tax breaks for your estate. You can place a piece of property or assets in a trust and identify your qualifying charity as the beneficiary. You will receive income from the trust for a specified duration of time or your entire lifetime, whatever is specified in the trust. At the designated time, usually at your death, the property, or asset, would then transfer to the charity. By donating the asset to a charity you remove it from your estate and it is no longer subject to estate tax. You can also earn income tax deductions and avoid capital gains. A CRUT or CRAT are two common types of charitable remainder trusts. The differences between a CRUT (or charitable remainder unitrust) and CRAT (charitable remainder annuity trust) are described at: http://www.philanthromedia.org/archives/2004/10/crat_versus_crut_choosing_the.html. This site explains that with a CRUT you can receive a fixed annual payout of 5% but that payout will vary based on the market and how your assets are invested. With a CRAT, you would receive a fixed percentage of the asset based on the value at the time of donation. Consult an experienced estate planning attorney at Bredemann & Shellander, PLC to see if a CRT is an appropriate financial vehicle for you.
Tax savings should be just one part of your estate plan. You and your estate planning professional should consider your long term goals for your finances and legacy when deciding if and how to structure your trust. Work with your estate attorney to create the best structure for you and your beneficiaries.