What Is a Trust and Does It Avoid Estate Taxes?

When it comes to estate planning, you should always have a will. However, there is another option that you can have in addition to a will, called a trust. If you are not familiar with estate planning, you probably have many questions about what trusts are, how they work, and what benefits they provide over a will. Remember, it may be beneficial to have a trust in addition to your will, but you should never have a trust as a substitute for a will. This guide will explain what a trust is and what it is useful for.

What Is a Trust?

A trust is an agreement between the estate owner, called the benefactor, and the person who sets up the trust, called the trustee. When a trust is created, the benefactor transfers a set of belongings to the trustee and sets a condition on the trust. When this condition is met, the trustee transfers the belongings to whoever the benefactor designated. Often, the items are transferred back to the benefactor, but if a trust is being used for estate planning purposes, the items will be transferred to the loved ones of the benefactor, who are called beneficiaries. In estate planning, the condition set on the trust will be the death of the benefactor.

Taxation

You may have heard that a trust can avoid estate taxes, which may make them a more viable option than a will. Is this true? In certain states, the answer is yes. It is possible for items in a trust not to be taxed. This is only true for asset protection trusts, which are only legal in certain states. It is entirely possible that items in a trust will be taxed along with the rest of the estate. However, even if a trust is not taxed, you will still have to pay a trust fee, which is often higher than what the taxes would otherwise be. Avoiding taxation is generally not a good reason to have a trust, but there are several more significant benefits of trusts which make them more worthwhile. A trust:

  • Allows you to put conditions on your possessions
  • Avoids the probate process
  • Avoids creditors

The most common reason trusts are set up is so the benefactor can put conditions on the belongings. For example, you could make it so that your grandson receives $500 if he is in high school, $1,000 if he is in college, or $2,000 if he has graduated. That would not be possible with a will. Ask an estate planning attorney, like an estate planning attorney in Mesa, AZ, if a trust is a good option for your estate.

Thanks to Citadel Law Firm for their insight into what a trust is and whether you have to pay taxes on it.