Trusts

Trusts provide a way to preserve and protect assets, as well as pass assets to heirs outside of the probate process.  They are frequently utilized in estate planning to minimize estate taxes.  They can also be used to protect assets by moving assets away from the grantor.  Trusts are typically formed under state law, however unlike corporations and LLC’s they are not usually registered with the state in which they are formed.

Trusts usually have grantors, trustees, and beneficiaries.  The grantor contributes assets to the trust and executes the formation of the trust.  The trustee is designated by the grantor, who manages the trust assets for the benefit of the beneficiaries according to the terms laid out in the trust.

A trust can be revocable or irrevocable.  A revocable trust, frequently referred to as a living trust, allows the grantor to retain control of the assets while at the same time allowing those assets to pass outside of the probate process.  A revocable trust typically does not enable the trust assets to avoid estate taxes.

An irrevocable trust, on the other hand, involves the transfer assets out of the grantor’s name and typically causes the grantor to lose control of those assets.  Because these assets are transferred out of the grantor’s estate, they typically avoid estate taxes in many circumstances.

Gift and estate taxes

Taxes are levied upon a decedent at both the federal and state level.  At the state level, such taxes are commonly referred to as inheritance taxes while at the federal level such taxes are commonly referred to as estate taxes.

Estate taxes

The estate of the decedent is subject to estate taxes if it exceeds certain an exemption threshold, which is $5,430,000 for an individual and $10,860,000 for a married couple for the 2015 tax year.  The size of the estate can be reduced by making gifts up to the the annual exclusion limit ($14,000 per person in 2015).  Gifts over and above this exclusion limit will trigger the gift tax and will require that a gift tax return be filed.  Gifts to certain persons and entities can be unlimited and are not subject the the annual exclusion limit.  These include gifts to your spouse, gifts to certain charities, gifts related to certain higher education expenses, and gifts related to certain medical expenses.

Wills, trusts, and estates

Wills
Trusts

A trust is a legal entity created under state law which allows trustees to manage assets on behalf of beneficiaries.  They are oftentimes constructed in order to control, restrict or limit access to the trust assets.

Estates

An estate is a legal entity which is created upon either a bankruptcy filing or the death of an individual, and consists of all of the assets and liabilities of the individual.