A trust is a set of instructions created by a legal arrangement that names an individual or institution responsible for distributing assets to beneficiaries. A common reason for setting up an estate plan is to save money on tax liability when the estate is passed on to its recipients. As of 1999, only the first $650,000 of your estate can be transferred tax-free. The rest is subject to estate taxes and you can wind up leaving a lot less to your beneficiaries than you thought you would be. Estate plans take advantage of certain tax avoidance techniques such as the following:
There are all sorts of trusts that each serves separate and unique purposes. A living trust is an estate planning tool that starts working during your lifetime. In establishing a living trust, you are essentially reregistering your assets to the trust and the trust becomes the owner of your assets. That way when you die, since the assets are owned by the trust and not you, probate will be avoided.
The credit shelter trust is a revocable living trust that contains a provision for the creation of a credit shelter upon the death of the first spouse. Credit shelter trusts are usually established to provide for a spouse, children or other beneficiaries as well as to reduce the amount of estate tax due upon the death of the second spouse. This type of trust can be designed to pay income from the assets in the trust to the surviving spouse or other beneficiary after the death of the first spouse. This trust also allows the grantor to take advantage of the Unified Tax Credit; therefore as long as the value of the trust does not exceed $650,000, it can be passed on to the beneficiaries free of federal estate tax.
A marital trust is used to protect the property you intend to pass to your spouse at the time of your death. The only beneficiary of your estate upon your death can be your spouse in this type of trust. Assets in a marital trust avoid probate at the time of your death and at the time of your spouse's death. The terms of the trust can determine how much control your spouse has over the assets in the trust.
In order to set up a trust, you will need the assistance of a qualified estate planning attorney to establish a document trust. You should choose an attorney who specializes in the fields of trusts, wills, probate and estate planning as they will be able to provide you with the most sound legal advice. Often the expense incurred in retaining an attorney to help you prepare and put your estate plan into place will cost you a lot less in the long term compared to what you and your family could stand to lose with no or poor planning. So who should have an estate plan set up? Basically, an estate plan can benefit almost everybody. If your net worth is less than $650,000, you do not have to worry as much. However, if you meet any of the following criteria, you should consider setting up an estate plan.