A trust can be a useful way to protect property from certain creditors, reduce the size of your estate to keep taxes lower, and provide for children without giving them direct access to assets. If you choose your trustee carefully, a trust can also provide for careful management of your assets as you grow older.The basic structure of a trust is fairly simple. A trust is a legal
arrangement where a trustee holds legal title to the property in the trust and manages it for the benefit of another person or several people. The trustee may be a person or it may be an institution like a bank. When you put money or other property into a trust you are called the "grantor" or "settlor." The person or people who benefit from the trust are called the "beneficiaries." Almost any kind of property can be transferred into a trust, including real estate, stocks, bonds, bank accounts, and insurance policies.
There are different kinds of trusts. An "inter vivos" or "living" trust becomes effective while the grantor is still alive. A "testamentary" trust is established as part of a will, and doesn't become effective until the grantor dies. If a trust is "irrevocable" it means that the grantor can't take back the assets or change the conditions of the trust. If the trust is "revocable," it means that the grantor can take back assets or change the trust's terms. Revocable trusts don't provide tax benefits, and their assets are taken into account by Medicaid authorities when accessing long-term care assistance.
It's important to talk with an attorney before you set up a trust. He or she can help you decide whether it will accomplish your goals and will make sure that the legal requirements in your state are met.
Gifts can reduce estate taxes. The government allows gifts to individuals or non-profit agencies of up to $13,000 each year without incurring federal tax. If you give more than this amount to one person or agency during the year, you will owe federal tax on any amount over $13,000. If you have a living spouse, you and your spouse together may make a gift of up to $26,000 without owing the federal tax.
If you are thinking about giving away property that has increased in value since you first got it, keep in mind that assets are valued at the original purchase price, or "basis," for tax purposes. This rule can have a major effect on your own taxes and the taxes of whomever you give the asset to. If you have important assets that have increased in value — your home, for instance — check with a lawyer, accountant, or qualified investment professional before you decide to give it away.
Contact me if you are interested in hearing more about Trusts and Gifting.
Stacey R. Edwards Jones, Managing Partner