The Tax Benefits of Holding Assets in a Trust

Monday, January 2, 2023


67% of Americans say they don't have estate planning in place. They might avoid it because it's hard to consider the end of their own life. They might feel they don't have enough assets to bother with estate planning.

The truth is that everyone should do some estate planning, especially to take advantage of the tax benefits that come with it.

While you may want to pass on your assets to loved ones, you also don't want the tax implications to eat up the inheritance, either.

Read on to consider how using a trust could help you avoid taxes.

Marital Transfers

One option is for the assets to be placed in a trust. When the grantor dies, there is a marital transfer set up. This allows the living spouse to avoid paying taxes while the assets remain in the trust.

Once assets get placed in a trust, the rules change for taxing them. It depends partly on what type of trust is used. There are a few kinds of marital trusts, including AB Trusts and QTIP Trusts.

According to the IRS, the spouse must be a US citizen to take advantage of this option. This option doesn't entirely avoid paying taxes but delays it.

Gifting to Children and Grandchildren

Before worrying about how the assets will get taxed, consider gifting some of them while you're still alive to avoid taxes that might arise later on.

If you gift to those who might later inherit, you can avoid some taxes.

The gifted assets won't get taxed if you don't gift more than the annual limit. You can even set it up so that your trust will gift out up to the yearly limit while you're alive.

Irrevocable Life Insurance Trust

Many people purchase life insurance to protect their loved ones when they're gone. One clever estate planning strategy is to establish an irrevocable trust.

The trust should have enough assets to pay for the life insurance premiums. The trust is also the beneficiary of the life insurance policy. So, when you die, the life insurance policy actually pays the trust.

Then the trustee can distribute the assets out of the trust per your wishes, and taxes don't need to get paid on them.

Gifting to Minors

You can use two types of trusts to set up gifts for minors. These trusts are categorized under two laws:

  • The Uniform Transfers to Minors Act
  • The Uniform Gifts to Minors Act

The grantor, or the person creating the trust, can put assets into these trusts. A custodian can manage the trust while the recipients are minors.

You can also exceed the federal gifting limit, and the minor is the one who is taxed. The difference is that the minor is taxed at their taxable rate versus the grantor's rate. Usually, the minor makes very little money, so the tax rate is much lower.

Use These Estate Planning Tax Benefits to Lower Your Tax Liability

A host of tax benefits are available through estate planning, making it worth the time and resources to create a trust. You don't need to spend your life saving and building wealth only to have it paid out in taxes when you're gone.

If you need help with creating an estate plan and considering the best way to save on taxes, we can help. Contact us today so we can get started helping you with your estate and trust planning needs.



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