New York Estate Planning & Elder Law Blog
Many people are curious about what happens after they are no longer able to manage their assets. Many chances are created when it comes to estate planning arrangements and trusts play a large role in estate planning. If you choose wisely, trusts fortunately can prove to be an excellent way to reduce the taxes ultimately placed on your estate.
Establishing a Trust
Trusts are a type of arrangement used to the advantage of entities or people that the trust creator selects. Trusts vary greatly in activation as well as how they are accessed. Trusts tend to break down into the following kinds:
- Irrevocable and revocable trusts. When a person places assets in a revocable trust, the person who creates the trust can still access these assets while the individual is alive. On the other hand, in the case of irrevocable trusts, a person who creates these trusts gives up the ability to reclaim assets after a trust is designated.
- Living and testamentary trusts. Testamentary trusts are part of a “probate” estate contained in a person’s will. Testamentary trusts become effective at the time the trust’s creator passes away and are irrevocable. Conversely, living trusts or “inter-vivos” trusts can help greatly with planning for incapacity.
- Non-grantor or grantor. In arrangements involving grantors, income is routinely taxed not to the trust but the grantor. Meanwhile, in arrangements involving non-grantors, income is often taxed to trusts.
What You Can Do To Minimize Estate Taxes
If you’re worried about taxes, you should consider an irrevocable life insurance trust, which is often used to maintain life insurance for beneficiaries while also providing insulation from creditors and reducing taxable estates. “Death benefits” found in life insurance policies are often protected from the estate tax, but policy premiums can be created as tax-free gifts that exist inside irrevocable life insurance trusts.
Spousal lifetime access trusts are advantageous because they can help spouses realize similar tax reductions while also keeping indirect access to cash value in one another’s life insurance policies. These trusts are similar to irrevocable life insurance trusts with additional access during a spouse’s life for things like health, support, and education.
Adequate structure of a spousal lifetime access trust is critical including ensuring that it is not a “mirror” image of a spouse’s as well as that the spouse is not listed as a trustee, that the trust is not established as a modified endowment contract, and that no negative tax consequences of any other kind exist.
When adequately structured, assets that belong to an Intentionally Defective Grantor Trust also pass to beneficiaries without being subject to an estate tax. By being subject to individual income taxes, a grantor can avoid the tax brackets that often apply to estates and trusts while permitting trusts the advantage of not being depleted by the trust’s tax payments.