Why Trusts Help You in Estate Planning

You do estate planning to handle your affairs when you no longer can and to distribute your estate to your beneficiaries. Transferring your wealth effectively and efficiently is important so it goes to the beneficiary you choose and minimizes tax losses. Using a trust can help you accomplish this. Here's why...

*Both taxation and probate takes a toll on wealth transfers:

After you die, our federal government taxes what you then owned by the Estate Tax and also what you've given away during your life by both the Gift Tax and the Generation-skipping (GS) Gift Tax. Your own state imposes either a State estate tax or a State inheritance tax.

What you own in your name only that has no automatic transfer arrangement to a designated beneficiary must go through your state county's Probate court. That's both costly and generally a slow process.

*Marital deduction and tax exemption levels help avoid tax loss at your death:

Two basic ways to avoid transfer taxes are to take advantage of the unlimited marital deduction and tax exemption levels. When you die, you (i.e. your estate) can transfer an unlimited amount of your property to your spouse without incurring any estate tax. But of course, that wealth will pile up in her estate to be taxed when she dies. So your wealth is still taxed at your 'generation' level before it gets to the kids.

Estate, gift, and GS taxes each have specific exemption levels below which you're not taxed. Today (2011) these are at $3.5 million. So, if you're wealth and giveaways are under this, you won't be taxed.

There's also an annual gift tax exclusion level ($13,000 in 2011) per donee which is never taxed nor recorded. These exemptions are for wealth you don't transfer directly to your spouse.

*Circumstances, programs and procedures can undermine effective transfers:

It's sometimes difficult to transfer your wealth to your intended beneficiaries. A few examples illustrate this:

1. Leaving property to a current wife but still wanting that property - after her death - to go to your children from a first marriage can be problematic Because if she owns the property she can decide to do with it what she wants and not honor your wishes

2. Government programs that help a special needs adult child can be interrupted if you leave money to him for his support.

3. State probate rules that determine spouses' and children's rights to inherit may override how you intend to transfer wealth solely in your name.

These circumstances can undermine getting your wealth to who you want to give it. That's because your property has to be owned by someone - if not by you. And he who owns something can do with it as he (or she) wishes.

*Trusts can be the solution to your problems:

The solution is to create an entity that has the legal status of an individual but will do what you intend it to do. And that's just what a trust is - a separate legal entity.

Trusts can own and transfer property. The trustee handles this for the benefit of your beneficiary (the trust's beneficiary). He does so according to the terms specified in the trust document which you, as the grantor of the trust, write up according to your wishes.

It's the ability of a trust to be a separate legal entity receiving and holding wealth you give it but act (transfer or gift wealth) under your wishes as expressed in the trust document that makes it helpful to both effectively and efficiently transfer your wealth.

Different types of trusts are designed to accomplish one or more of your concerns about reducing estate taxes, reducing gift taxes, avoiding probate, and others. Learn which one is best for your circumstance and wishes.

Comments? Questions? Email Here

© HowtoAdvice.com

How to Advice .com