There are many reasons to set up a trust, from asset protection to transferring of possessions to estate planning. You may have heard that a trust is a good way to avoid taxes too, which may make you wonder whether there are tax reasons to set up a trust. Speaking with a trust attorney and estate planning lawyer is always a good idea, but this simple guide will go over the basics of what a trust is and how one relates to taxes.
What Is a Trust?
A trust is an agreement where an individual transfers assets to a third party and sets conditions for when those assets are returned or distributed to a determined group of people. The most common use for a trust is passing on one’s estate after one’s death. An individual can set their worldly possessions aside in a trust and set it so it is given to his or her loved ones at the time of his or her death.
Some people set up a trust to protect their assets instead. Because ownership of assets is legally transferred to someone else, debt collectors and lawsuit rulings can sometimes not access it. This is called an asset protection trust and it is only legal in about 15 states.
Should You Set up a Trust To Avoid Taxes?
It is true that a trust avoids many of the taxes associated with setting up a will. This is one of the advantages that a trust offers over the alternative, but this is not a good enough reason on its own to set up a trust. In other words, you should not create a trust to avoid taxes alone. A better way to think of it is that avoiding taxes is just another benefit if you have to create a trust for another reason. There are many reasons this is true:
- Your possessions are not accessible to you while in a trust.
- Setting up a trust can be an expensive process.
- Transferring your assets to a third party inherently puts you at risk of your assets being stolen.
It all depends on the reason you are considering setting up a trust. If you are planning your estate, but the thought of a portion of it going to taxes rather than your loved ones irritates you, a trust may be a good choice. Your trust lawyer in St. Peters, Missouri will be able to give you more information that is tailored for your unique situation specifically.
Thanks to the Legacy Law Center for their insight into estate planning and asset protection trusts.