Trusts and Federal Income Taxes: Part 2 of 3
Jan 15, 2012 / By: Geoffrey H. Garrett, Estate Planning Attorney / Category: Estate Planning, Financial Planning, Taxes, Wills and TrustsContrary to popular belief, trusts rarely produce large tax savings. Many people create trusts to avoid placing their assets through probate courts. Thus, although trusts can help you save money on probate expenses, they may not reduce your federal estate taxes. If you create an irrevocable living trust, you may be able to reduce your income tax liabilities because you can effectively remove the assets within your irrevocable trust from your probate assets. You may also want to create a trust to help preserve privacy. Because wills are made as part of public records in probate courts, you can preserve anonymity and the identity of your beneficiaries by creating a trust.
You can create a revocable or irrevocable living trust. An irrevocable living trust is one that is not modifiable. You cannot change the terms of an irrevocable trust instrument or change your beneficiaries. However, if you create a revocable living trust, you can change the terms your trust document or revoke the entire instrument. Although a revocable living trust is more flexible than an irrevocable living trust, you may be able to reduce your tax liabilities by creating an irrevocable trust. This is because the federal tax code considers a gift to an irrevocable living trust as property of the trust since you retain no control over its disposition. However, since you can change the disposition or beneficiary of a revocable living trust, you may not receive any tax benefits. Carefully considering tax implications is an important part of estate planning.
Byrd : Garrett, PLLC is a member of the American Academy of Estate Planning Attorneys.
Tags: Estate Planning, Taxes, trusts
