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Federal and state estate taxes can take a hefty portion of large estates, leaving far less for your beneficiaries. Typically, these taxes only apply to very large estates, those with several million dollars in assets. If you own an estate large enough to be burdened by estate taxes when you die, you can decrease your tax burden by setting up trusts during your lifetime. Trusts hold ownership of your property, distributing the income and principal after your death according to the terms of the trust document. There are many types of trusts designed to fit a variety of estate planning goals.
Bypass Trusts
With a bypass trust, also called an AB trust, you may be able to avoid the taxes your spouse's estate pays at the time of her death by leaving some property in trust for your children while allowing your spouse to use it during her lifetime. Since your spouse does not legally own the property you leave in the trust, it does not become part of her estate when she dies. Instead, it simply passes to your children under the terms of the trust document.
Generation-Skipping Trusts
If you want to leave money to your grandchildren, a generation-skipping trust can help by removing the gifts from your estate long before your death. Under a generation-skipping trust, you deposit money or assets into the trust at any point during your lifetime. The assets you put into the trust can grow during your lifetime but your estate tax exemption is only decreased by the amount you originally put into the trust. For example, if you put $100,000 into the trust but it grows to $300,000 by the time of your death, your estate will only be taxed as if you gave $100,000 to your grandchildren.
Charitable Trusts
Charitable trusts can help you benefit a charity while still protecting your estate from taxes. With a charitable lead trust, you place assets in a trust that allows the charity to collect the income from the assets for a certain period of time. After that time, the assets go to your beneficiaries. You may have to pay a gift tax when you create the trust, but that amount may be far less than the estate tax you would otherwise have to pay. With a charitable remainder trust, your assets are held in trust for a certain period of time with the income going to you or other beneficiaries. After that period of time, the assets transfer to the charity.
Other Methods
While trusts can be an effective way to avoid estate taxes, they are not the only way. You can gift portions of your estate to your loved ones during your lifetime, for example, and avoid estate taxes on those portions that you gift away. Tax-free gifts have a yearly maximum set by federal law. You can also avoid having life insurance policies included in your taxable estate by avoiding ownership of those policies. If someone else owns an insurance policy on your life, the policy's value is not included in your estate for estate tax purposes. If you own the policy, however, it is generally included in your estate and can be taxed.
Since tax consequences can change depending on the circumstances of each family's case, it can be a good idea to consult an attorney about the best ways to avoid taxes.
Bypass Trusts
With a bypass trust, also called an AB trust, you may be able to avoid the taxes your spouse's estate pays at the time of her death by leaving some property in trust for your children while allowing your spouse to use it during her lifetime. Since your spouse does not legally own the property you leave in the trust, it does not become part of her estate when she dies. Instead, it simply passes to your children under the terms of the trust document.
Generation-Skipping Trusts
If you want to leave money to your grandchildren, a generation-skipping trust can help by removing the gifts from your estate long before your death. Under a generation-skipping trust, you deposit money or assets into the trust at any point during your lifetime. The assets you put into the trust can grow during your lifetime but your estate tax exemption is only decreased by the amount you originally put into the trust. For example, if you put $100,000 into the trust but it grows to $300,000 by the time of your death, your estate will only be taxed as if you gave $100,000 to your grandchildren.
Charitable Trusts
Charitable trusts can help you benefit a charity while still protecting your estate from taxes. With a charitable lead trust, you place assets in a trust that allows the charity to collect the income from the assets for a certain period of time. After that time, the assets go to your beneficiaries. You may have to pay a gift tax when you create the trust, but that amount may be far less than the estate tax you would otherwise have to pay. With a charitable remainder trust, your assets are held in trust for a certain period of time with the income going to you or other beneficiaries. After that period of time, the assets transfer to the charity.
Other Methods
While trusts can be an effective way to avoid estate taxes, they are not the only way. You can gift portions of your estate to your loved ones during your lifetime, for example, and avoid estate taxes on those portions that you gift away. Tax-free gifts have a yearly maximum set by federal law. You can also avoid having life insurance policies included in your taxable estate by avoiding ownership of those policies. If someone else owns an insurance policy on your life, the policy's value is not included in your estate for estate tax purposes. If you own the policy, however, it is generally included in your estate and can be taxed.
Since tax consequences can change depending on the circumstances of each family's case, it can be a good idea to consult an attorney about the best ways to avoid taxes.
Posted in: Estate Laws
