If someone told you that you could work with an estate planning lawyer to create a defective trust how would you feel about that? Most people are automatically going to equate the term “defective” with something that is useless.
In fact there is an estate planning device called an intentionally defective grantor trust that is in fact more effective than it is defective in practice.
Some people have to take steps to gain estate tax efficiency. The estate tax exclusion is $5.25 million in 2013, and the top rate is 40%. As a result anything that you want to transfer to your heirs that exceeds $5.25 million is potentially taxable.
Assets that you convey into an intentionally defective grantor trust are no longer a part of your estate for estate tax purposes. The reason why the trust is “defective” is because you are required to pay income taxes on the trust’s earnings.
This can actually be somewhat of a good thing. The trust itself doesn’t have to pay taxes on an ongoing basis so the beneficiaries will receive maximum distributions.
Plus, as you are paying the taxes you are doing this with assets that would otherwise comprise part of your estate, so you are reducing the taxable value of your estate along the way.
These devices can be quite useful for those who have significant resources to leave behind to their loved ones. If you’re interested in learning about them in greater detail you can simply click this link to request a free consultation with our firm: Free Indianapolis Estate Planning Consultation.
Mr. Kraft assists clients primarily in the areas of estate planning and administration, Medicaid planning, federal and state taxation, real estate and corporate law, bringing the added perspective of an accounting background to his work.
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