In our last post, we discussed some of the basics about making gifts as part of your estate plan. In this post, we will discuss a couple of other estate planning tools that can also be used to help you distribute and protect your assets while minimizing the tax consequences.
Trusts are useful estate planning tools that can be used for a number of purposes. They provide a way to avoid the probate process and they can be created and funded while you are alive or begin functioning when you pass away. Perhaps the biggest benefit of using trusts is their ability to protect assets from taxes. There is a wide variety of trusts that can be used to pass assets on to others, but here we will focus on two types of charitable trusts: Charitable Remainder Trusts and Charitable Lead Trusts.
A Charitable Remainder Trust essentially allows you to create a trust for the benefit of named beneficiaries for a certain period of time after which the "remainder" (the assets still in the trust) is distributed to charities chosen when the trust was created. There is a great deal of flexibility in this arrangement concerning how long the trust lasts and how much of the trust is distributed to beneficiaries, but there are some guidelines providing how much or how little can be distributed each year.
A Charitable Lead Trust is a little different in that they are generally funded with assets that are meant to appreciate over time. The trust is designed to use those assets to make payments to a charity for a set period of years. At the end of that period, the remaining assets of the trust will be distributed to your beneficiaries. The biggest thing to keep in mind with these trusts is that you may end up paying taxes on the income generated, but it may save you money on gift taxes further down the line.
Keep in mind that the descriptions of these trusts are very surface level. If you have questions about forming a trust or protecting your assets, make an appointment to speak in person to an experienced estate planning lawyer.
Source: The Spectrum, How to smartly give away assets, 11/14/10