Does a Living Trust Protect Assets From the Estate Tax?

Does a Living Trust Protect Assets From the Estate Tax?The legal device called a revocable living trust can provide a number of different useful benefits, but there are some objectives that could not be satisfied through the creation of this type of trust. Let’s look at the details.

Incidents of Ownership

When you look at the name, you see that a living trust is revocable. There is nothing tricky about this definition. You have the power of revocation when you create this type of trust, and you can exercise this right and dissolve the trust entirely at any time. The assets would once again be in your direct personal possession if you revoke the trust.

You can act as the trustee and the beneficiary while you are living, and most people do assume these roles. The ultimate goal is to use the trust as an estate planning device, so you name a successor trustee, and you name successor beneficiaries. After you are gone, the successor trustee would distribute assets in the trust among the beneficiaries in accordance with your wishes.

These distributions would not be subject to probate, which is a time-consuming and potentially expensive legal process. This is a major benefit, plus, you do not have to allow for lump sum distributions to the beneficiaries. To prolong the viability of the trust, you could allow for limited monthly distributions over an extended period of time.

Since you can revoke the trust and act as the trustee while you are alive, you are retaining incidents of ownership in a legal context. As a result, assets in the revocable living trust would be countable from an estate tax perspective.

The federal estate tax is potentially applicable on asset transfers to anyone other than your spouse that exceed $5.43 million in value. This tax carries a hefty 40 percent maximum rate.

Wealth Preservation Trusts

Assets in a living trust would be part of your taxable estate, but there are other trusts that are used to provide estate tax efficiency for high net worth individuals. These trusts are irrevocable trusts, and you surrender incidents of ownership when you establish this type of trust.

One type of trust that you could use to gain estate tax efficiency is the generation-skipping trust. With this type of trust, two generations could benefit from assets in the trust, but there would be just one instance of taxation.

Qualified personal residence trusts can also be useful if you want to transfer your home to a beneficiary at an estate tax discount. Another wealth preservation trust that can be utilized  if you have highly appreciable assets is the grantor retained annuity trust, and charitable trusts can also provide estate tax efficiency under some circumstances.

Attend a Workshop

If you would like to discuss your tax situation with a licensed professional, attend one of our free Living Trust Seminars: Naples FL Estate Planning Seminars.

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