Trusts can help to minimize inheritance tax because it reduces the value of your overall estate by placing assets in a trust and naming your loved one as the beneficiary. When you set up a trust your assets are removed from your estate and put aside for the beneficiary. This enables you to protect your assets placed in the trust from any third parties including paying for long term care, bankruptcy and matrimonial issues.
To understand how a trust fund works, let’s look at an example. You’ve worked hard all of your life and built up a comfortable savings cushion. You know that sometime in the future you’re going to pass away, and you want your hard-earned savings to go to the people you love, or the charities or causes that you believe in.
Now, what about loved ones who are not as financially savvy as you? You could be concerned about leaving them a lump sum gift because they might use it irresponsibly. Furthermore, you may even like to see your money carry over for generations to come. If this is how you feel, then you should set up a living irrevocable trust. This type of trust can be set up to begin dispersing funds when certain conditions are met. There is no stipulation that you cannot be alive when that happens.
You can place cash, stock, real estate or other valuable assets in your trust. You meet with an attorney and decide on the beneficiaries and set stipulations. Maybe you say that the beneficiaries receive a monthly payment, can only use the funds for education expenses, expenses due to an injury or disability, or the purchase of a first home. It’s your money so you get to decide.
Because it’s irrevocable, you don’t have the option of later dissolving the trust fund. Once you place assets in the trust, they are no longer yours. They are under the care of a trustee. A trustee is a bank, attorney or other entity set up for this purpose.
Since the assets are no longer yours, you don’t have to pay income tax on any money made from the assets. Also, with proper planning, the assets can be exempt from estate and gift taxes. These tax exemptions are a primary reason that some people set up an irrevocable trust.
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