What Kind of Trust Works Best for Your Estate Plan?

There are two major categories of trusts, one in particular that everyone should have. Regardless of their financial status, most people could have an estate plan incorporating a trust to eliminate the need for a will to go through probate, according to a recent article from Forbes, “Which Trusts Save Taxes, Which Do Not, And Which Are Illegal?”

Probate is the process by which a court reviews a will, approves it as valid and approves the named executor. Depending upon your jurisdiction, probate can take a very long time and be quite costly. Documents going through probate also become part of the public record, and anyone can read them.  This includes your will, a listing of all your assets and their values and other personal information which is all made public during probate.  However, there is a way to keep your wishes private and avoid the expense of probate.

A revocable trust can be created, directing the disposition of assets. You will still need a will, but the will states that everything you own goes into the revocable trust. This is known as a “pour-over-will” since it pours all assets into the trust.

The trust is private, is not separately taxable and you may change it at any time. You may wish to add or subtract beneficiaries over time to be sure that the people inheriting your property are the ones you want.

A revocable trust is also tax neutral. Let’s say you transfer your house or stock into a living trust. It’s not considered a transfer for tax purposes.

The other major type of trust is an irrevocable trust. Generally speaking, once created and funded, assets in the trust may not be taken out of the trust, and the trust may not be amended. It is separately taxable and must file its own tax return. Transfers to an irrevocable trust can lead to gift taxes. However, it is an excellent means of saving income, gift, or estate taxes in the long run, depending upon how the estate is structured.

Two other types of trusts are foreign and domestic trusts. Most living and irrevocable trusts are domestic, meaning U.S. law is applied. However, if the trust is foreign, many complex rules could make U.S. beneficiaries taxable on their share of the tax income, even if the trust income is never distributed to them. For most people, these are not a useful option.

Other trusts are designed to save on state taxes. Some California residents want to avoid paying California taxes without moving. The typical living trust won’t help since the grantor must include the income on their tax return. They seek to shield assets from California’s 13.3% tax rate via a “NING,” a Nevada Incomplete Gift Non-Grantor Trust. There is a similar trust in Delaware, “DING,” and one from Wyoming known as a “WING.”

These trusts can be tricky, so be sure to work with an experienced estate planning attorney who is familiar with these trusts and the intricate details. Some taxpayers have found themselves in court for pushing the trust envelope too far. A man from Estes Park, Colorado, and another from Frisco, Texas, along with others, were indicted for conspiring to defraud the United States and assisting in the preparation of false income tax returns for promoting and selling abusive trust tax shelters for clients nationwide.

An ethical local estate planning attorney will not put their clients at risk with overly aggressive trusts but will instead craft an estate plan to achieve realistic goals of protecting assets, minimizing taxes and preparing the necessary documents to protect their clients.

Reference: Forbes (Nov. 24, 2023) “Which Trusts Save Taxes, Which Do Not, And Which Are Illegal?”