Broker Check

Estate Planning Opportunities

April 14, 2022

Trusts to Reduce Taxes on Your Legacy

There are many opportunities to start making plans for what will happen to your assets when you can no longer manage them. Trusts are a big part of the planning process, and if chosen wisely, can be a great chance to minimize taxes on your estate.

Creating Trusts

Estate Planning often involves creating trusts, which are legal arrangements that will benefit your chosen causes or people down the line. Trusts vary in how they are activated and accessed according to these basic types:

  • Revocable or Irrevocable
    • Revocable: In a grantor’s lifetime, he/she can reclaim property at will.
    • Irrevocable: A grantor relinquishes the right to reclaim property once the trust is designated.
  • Testamentary or Living
    • Testamentary: Part of the “probate estate” laid out in a grantor’s will, this becomes effective when the grantor dies, and then, becomes Irrevocable.
    • Living: Also called an “inter-vivos trust,” this transitionary method helps with incapacity planning, putting a trust into action before death and avoiding potential snags in the probate process.
  • Grantor or Non-Grantor
    • Grantor: Income is generally taxed to the grantor, rather than to the trust.
    • Non-Grantor: Income is generally taxed to the trust (unless it is being distributed that same year.)

How to Minimize Estate Taxes

If you have concerns about taxes, consider an Irrevocable Life Insurance Trust (ILIT). This type of plan is designed mainly to manage life insurance for your beneficiaries, while offering you insulation from your creditors and reductions on your taxable estate. A life insurance policy’s “death benefit” is usually protected from estate tax already, but even policy premiums can be structured as tax-free gifts inside the ILIT.

A Spousal Lifetime Access Trust (SLAT) can help happily married couples achieve similar tax reductions while helping them maintain indirect access to the cash values in each other’s life insurance policies. It is essentially an ILIT with added access during the spouse’s lifetime for health, education, maintenance, support, and under any other specified terms for withdrawal. Proper structuring of the SLAT is important, including making sure it is not a “mirror image” of your spouse’s, that the spouse is not also named as trustee, that it’s not set up as a Modified Endowment Contract (MEC), and that there will be no other negative tax consequences for either of you.

When properly structured, assets belonging to an Intentionally Defective Grantor Trust (IDGT) will also pass to beneficiaries free of estate tax. By taking on individual income taxes, the grantor avoids the compressed tax brackets that usually apply to trusts and estates, while allowing the trust the tax-free “gift” of not being depleted by its own tax payments.

With the help of an estate planning attorney or financial professional, you can explore the best opportunities for you to protect your assets from unnecessary charges, leaving behind as much of your legacy as possible.

Registered Representative. Securities offered through Cambridge Investment Research Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative. Cambridge Investment Research Advisors Inc., a Registered Investment Advisor. New South Wealth Management and Cambridge are not affiliated.