Trusts

A trust is a legal fiduciary arrangement that allows a third party, known as the “trustee”, to hold assets on behalf of a beneficiary or beneficiaries. Trusts can be arranged in many ways and can specify exactly how and when the assets pass to the beneficiaries. Trusts are often set up to hold assets for the benefit of young children or grandchildren under age 21, or to help protect the assets of ailing parents from being consumed by late life medical care or nursing home expenses.
 
Since trusts usually avoid probate, your beneficiaries may gain access to these assets more quickly than they might to assets that are transferred using a will. Additionally, if it is an irrevocable trust, it may not be considered part of the taxable estate, so fewer taxes may be due upon your death.
 
Assets in a trust may also be able to pass outside of probate, saving time, court fees, and potentially reducing estate taxes as well.
 
Since probate is a matter of public record, a trust may allow assets to pass outside of probate and remain private, in addition to possibly reducing the amount lost to court fees and taxes in the process.
 
You can specify the terms of a trust precisely, controlling when and to whom distributions may be made. You may also, for example, set up a revocable trust so that the trust assets remain accessible to you during your lifetime while designating to whom the remaining assets will pass thereafter, even when there are complex situations such as children from more than one marriage.
 
A properly constructed trust can help protect your estate from your heirs' creditors or from beneficiaries who may not be adept at money management.
 
However, the one drawback to trusts is that they are not a good place for earning income. Why? Because the Federal income tax levied on trust income reaches the maximum Federal income tax rate of 37% at just $13,050 in annual trust income.  Ouch!

> View/Download table as a PDF

If the income realized in a trust will be significantly higher than $2,500, the trustee should consider distributing some or even all such trust income to the beneficiaries during that tax year to minimize overall Federal income tax liabilities.

I can prepare trust tax financial models that will help trustees with these calculations.

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