Estate planning can help you and your beneficiaries reduce the impact of hefty estate taxes. These are taxes that the government usually takes upon your death and the distribution of your properties to your beneficiaries. Estate taxes might take a significant portion of your assets and prevent your heirs from fully benefitting from your hard-earned wealth.
There are several ways to minimize the impact of estate taxes, usually depending on the nature of your assets. A popular method is by taking advantage of trusts.
What is a trust?
A trust is a document that transfers your assets, usually money, to a trustee. This asset is the principal. Upon your death, the trustee distributes your assets to your intended beneficiaries, either lump sum or staggered, according to your instructions.
Some people choose to use a trust instead of a will, although utilizing both in your estate plan is possible. Doing so generally gives you greater freedom in distributing your assets, such as requiring conditions before an heir receives their inheritance.
How does a trust help?
By transferring your assets through a trust, you are essentially decreasing the size of your estate. This might reduce how much of your estate is taxable or even put your asset size below the federal estate tax exemption. The government does not typically charge estate taxes on estates below this exemption.
Furthermore, beneficiaries are often not subject to taxes when they receive distributions from the trust’s principal balance. However, the government will likely charge them taxes for income that the trust may have gained over time.
Creating a trust is just one of several estate planning strategies that can help you reduce the cost of probate and estate taxes. If you find estate planning complex, an estate planning attorney can help you understand the latest standards and guidelines and create a plan that matches your requirements.