Including a trust agreement in a comprehensive estate plan has become an increasingly popular thing to do over the last several decades. One reason for this is the flexibility trust agreements offer. Trusts have evolved to the point where there is a specialized trust for just about every estate planning goal or objectives these days. While it is clear that a trust agreement can help achieve a variety of different goals, do trusts save taxes? The answer to that is yes, a trust can help you and your estate reduce your tax liability.
All trust agreements fall into one of two categories – testamentary or living trusts. A testamentary trust does not take effect until after your death while a living trust will become active during your lifetime. When you die, all of the assets owned by you must be accounted for and valued during the probate process. Your estate will then owe gift and estate taxes on the value of those assets that exceeds your lifetime exemption limit. Property held in a properly drafted trust, however, does not become part of the probate process. More importantly, the value of the assets held in the trust are not included when calculating federal gift and estate taxes.
Along with shielding assets from gift and estate tax liability when you die, gifts made to a trust may also be shielded from gift and estate taxes is the gift is made pursuant to the annual exemption. The annual exemption allows each taxpayer to make gifts valued at up to $14,000 to as many beneficiaries as the taxpayer wishes without incurring gift and estate taxes on the gifts. Moreover, gifts made pursuant to the annual exemption are not counted when calculating lifetime gifts for purposes of calculating gift and estate taxes when you die.
People often use the annual exemption to make gifts to an unfunded Irrevocable Life Insurance Trust, or ILIT. The gift is then used to pay the premiums on the insurance policy held by the trust. This strategy can effectively allow you to avoid taxes on the money gifted to the trust which holds a life insurance policy that is ultimately paid out to your loved ones when you die.
If you have additional questions or concerns about trusts and taxes, or your Illinois estate plan in general, contact the experienced Illinois estate planning attorneys at Nash Bean Ford & Brown, LLP by calling 309-944-2188 to schedule your appointment today.
- My Parent/Spouse Shows Early Signs of Dementia. Can We Still Do Medicaid Planning? - July 20, 2015
- What Happens to a Living Trust When One Spouse Dies? - July 13, 2015
- Medicaid Spousal Impoverishment Rules - July 7, 2015