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The Differences Between Estate Trusts

The Differences  Between Estate Trusts

Trusts are often a critical part of any estate planning process. This means working with an estate planner to determine the types of trusts that will match your circumstances, while effectively lowering your estate tax burden. As a result, it might be worth consulting with a tax professional or financial planner, such as James Carroll in Tempe, AZ. Below is an overview of several different trust options that are available to you.


Irrevocable Life Insurance Trust (ILIT)


The type of trust allows you to remove the value of your life insurance from your estate because you make your ILIT trust the owner of those polices. As long as you live at least three years after you transfer your life insurance policies to the trust, the death benefits that come from this insurance will not be added to your estate as an asset.


Additionally, the trust is typically the beneficiary of the policy. This means that you can maintain the trust to give distributions to the individuals that you designate, from a spouse to children or even grandchildren. The proceeds are protected and must be accounted for, so they cannot be used to pay creditors, or for any irresponsible spending sprees. You can even set it up so that your spouse cannot access the trust or make decisions about how the funds are invested or managed.


Charitable Remainder Trust (CRT) or Charitable Lead Trust (CLT)


This particular trust is known as a CRT that allows you to convert a highly appreciated asset, which could be stocks or investment properties, to provide lifetime income without paying any capital gains taxes on that asset when it is finally sold. At the same time, this type of trust will reduce your income and estate taxes. The reason is because you are benefiting a charity through this trust. Essentially, you are transferring an asset into an irrevocable trust, which removes it from your estate and you get an immediate charitable income tax deduction. The trust will sell the asset at market value, pay no capital gains tax, and then reinvest the funds. You will receive income from the trust for the rest of your life. After you pass on, the trust will then donate the asset or assets to the charity that you have previously chosen.


The CLT gives the income from the asset to a charity of your choice during your lifetime, while allowing you to reduce your estate and get the tax deduction. Then when you pass on, the trust will give the asset to your specific beneficiaries.


Grantor Retained Annuity Trust (GRAT) and Grantor Retained Unitrust (GRUT)


This particular type of trust is very similar to a QPRT, but it is available for you to transfer income producing assets into a trust for a predetermined number of years, thus removing it from your estate while allowing you to still receive the income from the asset itself. Depending on whether the income fluctuates or not, will determine if you need to use a GRAT or a GRUT.


When the trust ends, the asset will now go to your beneficiaries, so the value of the gift will be reduced. If you die prior to the end of the trust, a portion of that asset or the whole thing may be included in your estate. Still, it is a way to reduce the value of the asset for your beneficiaries.


Limited Liability Company (LLC) and Family Limited Partnership (FLP)


If you are looking to reduce estate taxes by transferring assets to your children or beneficiaries now, consider using an LLC or FLP. This allows you to maintain some control over the assets during your lifetime, while protecting them from potential lawsuits and creditors.


You and your spouse can set up an LLC or FLP and transfer assets to it in exchange for ownership interests. You can even give ownership interests to your children, thus removing the value of this asset from your estate. At the same time, these assets cannot be sold or transferred without your approval. This will allow you to transfer the assets you have to your children at a reduced value but it also helps to reduce the amount of potential estate tax that will have to be paid.


As you can see, trusts can provide options to reduce your estate assets, while still maintaining control over potential income and assets during your lifetime.


Click on the link below to contact a tax professional or accountant at the offices of James Carroll in Tempe, AZ, who can assist you in finding the best trust option for your unique circumstances.


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