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How can a Trust Protect my Estate from Taxation?

On Behalf of | Mar 2, 2022 | Estate Planning, Trust & Estates |

What is a trust, generally?

A trust is an estate planning tool that allows an individual to transfer assets to a vehicle for the benefit of one or more beneficiaries. There are 3 major roles in a trust:

  • Grantor/Owner/Creator/Settlor – This is the person, people, or entity that establishes or creates the trust, deciding how it will operate.
  • Trustee – This is the person, people, or entity that manages the assets in the trust.
  • Beneficiary – This is the person, people, or entity for which the assets of the trust benefit.

What are the benefits of a trust?

The creator can have this estate planning tool drafted to help guide the distribution of the estate and serve a number of benefits.

Some of the more common benefits of a trust include:

  • Allowing a grantor to avoid probate – A costly, lengthy, and public court proceeding;
  • Reducing or eliminating estate taxes;
  • Maintaining a grantor’s control of their assets even after they die
  • Assisting family members with paying for education, medical needs; and
  • Providing funds for someone with special needs without impacting the beneficiary’s ability to qualify for other benefits.
  • Protecting a Grantor in case the grantor becomes incapacitated or otherwise

How do trusts reduce estate taxes?

On death, the government may tax your estate, depending on how much is in it. For 2022, the Minnesota estate tax rate starts at 13% for estates over $3 million, while the Federal estate tax rate starts at 40% for estates over $12.06 million. The government will tax estates over these amounts on death.

A grantor can reduce the size of their estate, reducing estate taxes, by properly using a variety of trust planning techniques such as (1) setting up a bypass and marital trust on their death (2) setting up an irrevocable trust during their life, or (3) setting up a charitable remainder trust during their life or on death. A grantor can use a combination if these trust planning methods to effectuate their estate planning goals. Doing so places the grantor’s assets into the trust, removes the assets from the estate, reducing the size of the estate, ultimately reducing estate taxes.

Despite the assets being removed from the estate, the grantor has substantial ability to dictate how the trust operates when they set the trust up (though changes or amendments are very difficult to do once a trust becomes irrevocable). The terms of the trust can include distributions to other beneficiaries to cover living expenses and other needs.

An attorney experienced in the drafting of these legal tools can review the options and discuss which are best for your situation.

Established more than 95 years ago, Quinlivan & Hughes ranks among the oldest and largest law practices in Central Minnesota. The full-service law firm has growing legal teams in the areas of Trusts & Estates Planning, along with practices in Business Law, Real Estate Law, Employment Law, Government Law, Insurance Defense, and General Litigation. Learn more at Quinlivan.com.

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