You have certainly heard of the legal device called a last will or last will and testament, and it is likely that you are also aware of the existence of trusts. Many people assume that all trusts are created equally, but in reality, different trusts serve very different purposes.
Let’s look at some of the details.
Revocable Living Trusts
A revocable living trust is a type of trust that can be useful if you want to facilitate timely asset transfers to your loved ones. The transfers would not be subject to probate, which is a time-consuming and often expensive process. If you use a will, probate would enter the picture, and your heirs would have to wait out the process of probate before they could receive their inheritances.
This type of trust would not provide tax efficiency. If assets in the trust earn income, you would be required to claim the income when you file your tax return. Plus, assets in a revocable living trust would be looked upon as part of your taxable estate for estate tax purposes.
Estate Tax Efficiency
The federal estate tax is applicable on asset transfers that exceed $5.43 million in 2015. In New York, there is a state estate tax to contend with as well, and it can be a factor if you are transferring more than $3.125 million (as of April 1st).
There are certain types of trusts that can provide estate tax efficiency. These would be irrevocable trusts, because you are surrendering incidents of ownership when you create this type of trust.
To provide an example, there is a type of trust called a qualified personal residence trust. Under certain circumstances, you may be able to use this type of trust to transfer your home to a beneficiary at a tax discount.
Another type of trust that can be used for estate tax efficiency purposes is the generation-skipping trust. With this type of trust, two generations can benefit from the assets, but there would be just one round of taxation.
These are just two examples, but there are other trusts that can be of value if you are concerned about estate tax exposure.
If you are interested in the possibility of creating a trust of some kind, our firm can help. We offer free consultations, and we would be glad to explain your options to you.
To set up an appointment, send us a message through our contact page: Long Island NY Estate Planning Attorneys.
Learn More at Forbes.com
We publish a great deal of useful content over at Forbes.com. Click this link if you would like to build on your knowledge: Forbes Contributor Mark Eghrari.