Tax efficiency can be an important consideration when you are positioning yourself financially. This comes into play throughout your life, and it is also a factor when you are planning your estate.
Certain types of trusts can be effective to provide tax efficiency under some circumstances, and there are other types of trusts that would not provide tax efficiency. Let’s look at the facts.
Federal Estate Tax
There is a federal estate tax that high net worth families must contend with, and it is a very big deal, because it carries a 40 percent maximum rate.
It is only a factor for people of considerable means, because there is a relatively high credit or exclusion. During the current calendar year, the exact amount of the federal estate tax exclusion is $5.43 million.
If you are faced with federal estate tax exposure, there are a number of different trusts that can be utilized to provide you with estate tax efficiency. The idea is to divest yourself of direct personal ownership of the assets, and they would no longer be part of your taxable estate.
Though you are divesting yourself of the assets for tax purposes, the trust will facilitate tax efficient transfers to your beneficiaries at some point in time.
Trusts that are used for estate tax efficiency purposes are irrevocable trusts. As the name would indicate, you cannot revoke or rescind this type of trust. You are surrendering incidents of ownership, and as a result, the assets in an irrevocable trust would not be part of your estate for tax purposes.
Revocable Living Trusts
Revocable living trusts are useful for people who are not exposed to the estate tax. You retain incidents of ownership with this type of trust, because you can in fact revoke the trust and take back the assets.
This type of trust is used by people who want to facilitate efficient postmortem asset transfers outside of probate. If you were to use a will instead of a living trust, the will must go through the probate process. This process is time-consuming, and your heirs would have to wait for the process to run its course before they could receive their inheritances.
When it comes to your income tax responsibility, if you convey assets into a revocable living trust, you would have to claim income that is earned by the assets on your personal income tax return.
Contact Our Firm
There are many different tools in the estate planning toolkit. If you would like to discuss the tax efficiency value of trusts with a licensed professional, our firm can help.
We offer free consultations, and you can request an appointment through our contact page: Indianapolis IN Estate Planning Attorneys.
Paul A. Kraft, Estate Planning Attorney
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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