How to Avoid Estate Taxes Using Trusts

Understanding how to protect your assets from estate taxes is one of the critical factors in giving your heirs the hard-earned wealth you have accumulated over a lifetime. Although a small percentage of Americans face the federal estate tax, the often financially burdensome tax negatively impacts more people than just the mega-rich.

If you want to avoid paying federal estate taxes, you could move to places such as Canada or New Zealand. However, why make a life-altering move over an issue that you can control by learning how to avoid estate taxes using trusts?

Setting up a trust represents one of the most dependable strategies to protect your wealth from federal estate taxes. If you establish the right trust, you can significantly decrease how much you pay in federal estate taxes or eliminate the onerous taxes from your personal finances altogether.

A trust is a financial structure made between three parties: the Grantor, trustee, and beneficiaries. The financial arrangement holds assets for beneficiaries until the time comes for the trustee to transfer the assets to the beneficiaries. A trustee is legally responsible for managing a trust on behalf of the grantor’s wishes.

Each dollar you move into a trust is important because each dollar removed does not fall under the costly 40 percent federal estate tax rate.

You have several types of trusts to consider that help you avoid paying federal estate taxes. The kind of trust you decide to establish depends on your unique financial considerations. Working with an experienced estate attorney can help you choose the best trust for yourself and your loved ones.

Qualified Personal Residence Trust

A qualified personal residence trust (QPRT) removes the value of a home from the total value of an estate. Since a home typically is the most valuable asset for most Americans, using this type of trust is the best way to reduce a federal estate tax burden. You transfer your home from your name into a QPRT, with the home remaining in the trust for a designated period until it is given to one or more beneficiaries.

Charitable Remainder Trust

Assets worth a considerable amount of money are the perfect assets to place in a charitable remainder trust (CRT) to reduce or eliminate federal estate taxes. Not only can you reduce or eliminate federal estate taxes, but you can also decrease the amount of money that you have to pay in capital gains taxes. A CRT is an excellent option if you own valuable stocks, real estate, or mutual funds. Your assets move into an irrevocable trust, which means the assets are no longer part of your estate.

Irrevocable Life Insurance Trust

Death benefits paid out of a life insurance policy can be taxed at the federal estate tax rate. Setting up an irrevocable life insurance trust (ILIT) lowers your federal estate tax bill significantly when it comes to death benefits for your loved ones. An ILIT transfers your life insurance policy into the trust, which means the trust receives your death benefits that are eventually passed on to your heirs on a specified date.

The three trusts we list here are just three examples of how to avoid estate taxes using trusts. Each trust also has a unique purpose of matching the individual needs of someone who wishes to avoid paying excessive estate taxes.

Effectively navigating the complex landscape of federal estate taxes is vital for preserving your hard-earned wealth for future generations. Utilizing trusts such as QPRTs, CRTs, and ILITs provides strategic solutions to either significantly reduce or eliminate estate taxes. Collaborating with an experienced estate attorney ensures the selection of the right trust tailored to your financial circumstances, offering a proactive approach to safeguarding your assets and securing a legacy for your heirs.