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Using Trust As An Estate Planning Tool

Sep 4, 2007
Ask any financial planner or an estate attorney, and the chances are that he/she will recommend going for a "Living Trust", or an "Inter-Vivos Trust" for complete estate planning. In many states, like California for example, a living trust, in most cases, would not require judicial intervention, better known as probate. This will saves you from increased costs that are incurred due to legalities. Living Trusts are highly suitable and recommended for estates of moderate size. This can be the assets of $300,000 or more for single person, and $500,000 for married person.

Primary Benefits of a Living Trust

. No probate or the resultant costs, for both single and married persons.
. Up to $ 1.0 million in exemption for married persons, which is slated to increase over the period of years
. You can select trustees (either trust companies, or individuals that you have confidence in) to take care, and handle the estate either in your absence, or inability, or death

Other Benefits

While these benefits are not applicable to everyone, the true advantage will be substantial. Here are some of the more indirect, but important benefits, depending on your conditions.

. A trust can help you protect your assets that are put under the trust, from creditors.

. Transferring assets to a disabled or handicapped, or a mentally challenged child via Special Needs Trust is very beneficial. This will ensure that your help is only meant to take care of the supplementary, and the long term need of such a child, so that the child continues to receive the basic state aid. With a Special Needs Trust, the beneficiary will continue to receive state aid like Supplementary Security Income, Medical Insurance, and Long Term Medial Coverage.

. A trust can be used to avoid taxation of life insurance proceeds, which can increase the proceeds available to your child by as much as 50%.

. Trusts can be used to pass property to children for the benefit of grandchildren, so as to avoid estate tax, and gift tax upon the death of your children. This can be done upto the extent permitted in your particular case, under the generation skipping transfer tax rules.

Tips to Reduce Estate and Gift tax

When you from a trust for the property that you intend to gift someone, you still retain the control of the property. Such a property gifted is a share, unit, or a percentage interest in a larger property. Here, the control to manage the property is vested with the trustee, or a general partner, or a manager. Many sophisticated techniques can be used wherein a "fractionalized" interest (like minority share of stock, or a minority partner interest) is gifted. This can be done by law at a lower value than the actual percentage ownership. Such a reduction in the valuation is called a "valuation discount".

Now as the value of the "taxable gift" is reduced, the amount of gift or estate tax payable is also correspondingly reduced. In a community property state, husbands and wives are entitled to "valuation discounts", and so are unmarried couples, partners, or singles that hold property interests as partners.
About the Author
Sacramento CPA Firm Murray and Young offer Tax Representation by a former IRS auditor. For useful articles and tips by Sacramento Estate Tax Planners, please visit our website at http://www.april15.com.
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