An important part of the process of setting up your estate is deciding what the best form for it to take would be. Living trusts offer many benefits over traditional estate options. You may have heard some mention that putting your assets into a living trust can help avoid estate taxes. For the most part, this is true, although there is more to the process that you need to understand. Learn everything you need to know about how living trusts work and how they relate to estate tax.
First things first, you need to understand how a trust works. It is actually quite simple at its most basic form. When you establish a trust, you give a third party, called a trustee, the ability to manage some portion of your estate. Conditions are set, and when these conditions are met, the assets in the trust are transferred to the benefactor. Because these assets are essentially being held by a third party, they are usually exempt from estate taxes. However, they may still be eligible for federal gift taxes to apply. Additionally, there are two types of trusts:
- Irrevocable Trust
- Revocable Trust
The only difference is that beneficiaries may access revocable trusts after they have been set up. If you later need to use some of the assets, you are free to do so. In some, but not all, cases a revocable trust may technically count as the trust assets still being a part of the beneficiary’s estate. If this is the case, the trust will still be taxed. In an irrevocable trust, the trust is always transferred completely out of the beneficiary’s estate, so it is always immune to estate taxes.
There is one other major benefit to setting up a trust besides avoiding taxes. Doing so also often allows the probate process to be skipped. Probate is the period when the estate is settled, including confirming the validity of the will, collecting and accounting for assets, paying debts and taxes, and distributing the estate. Trusts typically do not need to go through probate, which gets the assets into the hands of the benefactors quicker. If your loved ones going through the hassle of probate does not appeal to you, a trust may completely eliminate it. To be certain that your specifically chosen type of trust actually does avoid estate tax and probate, it is best to speak with a trust litigation lawyer in Cherry Hill, NJ. They can explain the whole process in greater detail, as well as any laws that only apply in your state.
Thanks to Klenk Law for their insight into estate planning and taxes for trusts.