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Do Assets Put in Trusts Avoid Estate Taxes?

Although there is no way to completely eliminate the estate tax through the use of a trust, a properly drafted trust instrument, coupled with knowledgeable estate planning, can help to reduce the estate tax burden.

For 2016, the federal estate tax exemption is set at 5.45 million dollars. This means that any estate with a total value of less than 5.45 million dollars can completely avoid estate taxes. The estate tax rate for estates in excess of 5.45 million dollars varies depending on your tax bracket. It is fairly certain though that the amount will be quite significant, reaching into the hundreds of thousands of dollars.

One of the benefits of a trust is that assets placed in a trust can avoid going through state probate courts and therefore avoid one level of "estate taxes" assessed as probate fees.

Another benefit of using trusts can be to avoid estate taxes by making use of the annual gift tax exemption (currently $14,000 per year). As an example, if you are married, your spouse and you can each gift $28,000 annual to a trust for safe keeping with your child named as the ultimate beneficiary. If you do this for 20 years before you and your wife pass away, you have effectively removed $520,000 from your estate and avoided estate tax on that amount by putting that money in a trust.

Before the estate tax was recently amended, a husband and wife also could have used trusts to effectively double the estate tax exemption. In this scenario, each spouse would have a will that created a trust upon death with the other spouse named as the beneficial owner for life, with the remainder being passed to his or her children. In such an instance a married couple could effectively double the estate tax exemption by not passing the assets directly to the surviving spouse.

A surviving spouse is able to make use of any unused exemption amount of the pre-deceased spouse. This revision effectively allows a married couple to avoid estate tax on up to 11 million dollars without having to place their assets in trusts. There are certain estate tax filing requirements to make use of this exemption that an estate planning attorney can explain to you.

The current estate tax provisions are effective through the end of 2016 and the federal estate tax exemption has been a heavily debated area in congress for decades. The likelihood of the exemption remaining 5.45 million dollars depends on the political climate in Washington and one should never use the assumption that the exemption will remain high as excuse for poor planning. An estate-planning expert can discuss in details all of the benefits of placing assets in trust other than the avoidance of federal estate taxes.

The use of trusts to assist in avoiding estate taxes is still a major concern for high net worth individuals. Anyone with an estate greater than the exemption amount should consult with an estate-planning expert and determine their best options based on the amount and composition of their estate.

For over 30 years, Cheadle Law has specialized in trusts, estate planning, wills, tax related to a trust, tax deferral, and other trust related matters. Tucker Cheadle has been the administrator for over 70 trusts and has the experience to optimize your trusts and the assets you place in them especially when related to the tax implecations. Contact Cheadle Law today at 949.553.1066 to set up a consultation to go over your specific needs.

A review of any materials on this web page, any preliminary comments or an introductory meeting does not constitute legal, income tax or accounting advice upon which reliance can be placed. The attorney client relationship can only be created by a written retainer agreement following a check of potential and actual conflicts of interest with other clients.
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