Use Trusts to Navigate Complex Inheritance and Tax Issues

Byron T. Deese Personal Finance Leave a Comment


Trusts are an excellent wealth management tool that can help you legally navigate inheritance and tax issues. Depending on your objectives, you can choose from one or more of several types of trusts. Here’s a list of the most popular trust types and their uses:

Revocable trust

A revocable trust can be modified, revised, or changed - assets can be added to or removed from it. Sometimes it’s referred to as a living trust. The main downside to a revocable trust is that the trustor (the person who sets up the trust and puts assets into it) continues to bear tax liability on the assets. Also, assets in a revocable trust could still be available to creditors in some situations. The big upside of a revocable trust is that its assets are passed to beneficiaries outside of probate.

Irrevocable trust

Irrevocable trusts are used to avoid personal tax liability and create greater safeguards on the transfer of assets. This type of trust has its own separate tax ID, and any income earned by the trust is not the personal responsibility of the trustor. Instead, the trust itself files a tax return each year using Form 1041. When assets are passed to beneficiaries, the beneficiaries may owe taxes in some situations.

As the name of the trust implies, the main difference with this type of trust is that assets placed in it cannot be removed. There’s a degree of permanency with an irrevocable trust - but this is counterbalanced by their tax efficiencies and ability for those involved to reduce or avoid estate taxes altogether.

Charitable trust

This type of trust is established to benefit a charity, which is named as a beneficiary. The charity must meet certain guidelines established by the IRS. For example, the charity must be tax-exempt.

The most common charitable trust is the charitable remainder trust. This type has many tax benefits, including tax deductions for the trustor, avoidance of estate taxes, and exemption from capital gains taxes in some situations.

A charitable remainder trust can also provide non-charitable beneficiaries with a percentage of assets or a stream of income - before the remaining funds go to the charity. This structure means a trustor can use the account as an annuity and as a vehicle for donating to their favorite charity.

Testamentary trust

A testamentary trust is set up in a last will and testament. It goes into effect after the trustor dies and the will goes through probate. This means it is revocable during the trustor’s lifetime but becomes irrevocable upon their death.

This type of trust is great for people who want to fund the trust with life insurance proceeds. To comply with federal regulations, the trustor must name their life insurance’s beneficiary as the trustee. This trustee will be responsible for managing the trust’s assets and protecting the interests of the trust’s beneficiaries.

Credit shelter trust

A credit shelter trust helps a married couple take full advantage of individual tax exemptions under US estate and gift tax laws. The couple’s children are typically listed as beneficiaries; and when the first spouse passes away, the surviving spouse is able to use the income from the trust without altering their own estate. When the second spouse dies, beneficiaries qualify for estate tax exemptions through the inheritance they receive.

Next steps

The trusts described in this article don’t constitute an exhaustive list. There are many other trusts, and some of those discussed here have sub-types. To discuss which one would be ideal for your circumstances, contact a financial planner at Glass Jacobson today.

About The Author

Byron T. Deese

Relationship Development Manager Learn More>>

Please consider sharing this post

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.