Is a Revocable Trust a Good Idea? YES. If chosen wisely, with the help of an experienced estate planning attorney, a trust can be a great chance to minimize taxes on your estate.
Forbes’ recent article entitled “Estate Planning Opportunities: How Trusts Can Minimize Taxes On Your Legacy,” explains that trusts are legal arrangements that benefit causes or people you choose down the line. They vary in how they are activated and accessed, according to these basic types.
- Revocable or irrevocable: In a revocable trust, a grantor can reclaim assets whenever they want during their lifetime. In an irrevocable trust, a grantor gives up the right to reclaim property once the trust is designated.
- Testamentary or living: a testamentary trust, created under a last will, becomes effective when the grantor dies and then becomes irrevocable to administer the inheritance. A living trust, also called an “inter-vivos trust,” is a transitionary method that helps with incapacity planning, putting a trust into action before death, and avoiding potential problems in the probate process.
- Grantor or non-grantor: In a grantor arrangement, income is generally taxed to the grantor rather than to the trust. In a non-grantor arrangement, income is generally taxed to the trust (unless it is being distributed that same year).
If you have concerns about taxes, consider an Irrevocable Life Insurance Trust (ILIT). This is used to manage life insurance for your beneficiaries, while offering you insulation from your creditors and reductions on your taxable estate. A life insurance policy’s “death benefit” is usually protected from estate tax already, but even policy premiums can be structured as tax-free gifts inside the ILIT.
There’s also the Spousal Lifetime Access Trust (SLAT) can help married couples achieve similar tax reductions while helping them maintain indirect access to the cash values in each other’s life insurance policies. This is essentially an ILIT with added access during the spouse’s lifetime for health, education, maintenance, support, and under any other specified terms for withdrawal.
When properly structured, assets belonging to an Intentionally Defective Grantor Trust (IDGT) will also transfer to your beneficiaries free of estate tax.
With the help of an experienced estate planning attorney, you can look at the best opportunities for you to protect your assets from unnecessary charges, leaving behind as much of your legacy as possible.
Reference: Forbes (May 23, 2022) “Estate Planning Opportunities: How Trusts Can Minimize Taxes On Your Legacy”