When most of taxpayers think of trusts, they typically are associated with those high income earners and not the average middle class family. Yet trusts can provide a vast number of tax saving options in terms of estate planning and long term income management. However, there is more to setting up a trust than you might initially think. Still, that does not place a trust out of your reach. By consulting with your financial planner or tax professional, such as EB TAX CONSULTANTS in BROOKLYN, NY, you can determine if a trust will work for your circumstances.
How Does a Trust Fund Works
Trust funds operate to protect the money that you have saved from either being squandered by your beneficiaries or being eaten up by estate taxes and other probate taxes and fees. The trust operates by providing the ability to have funds dispersed, but only as specific conditions are met by either the beneficiaries or charities. A trust can be effective in carrying money over to several generations by creating conditions that would keep the assets being invested and disbursements being given to the beneficiaries at pre-defined times.
A living irrevocable trust fund can be set up while you are still alive and you can place stocks, cash, real estate and any other valuable assets into the trust. During a meeting with the attorney, you can set up the stipulations and who will be the beneficiaries of the trust.
However, an irrevocable trust means that you cannot dissolve it at a later date and get your assets back. They are now essentially not yours, but belong to the trust and will be monitored by a trustee. The trustee can be an attorney, bank or any other entity that is set up specifically for this purpose. A benefit of the trust is that you will not have to pay income tax on money made from the assets that are now part of the trust. The assets may be exempt from estate and gift taxes. Additionally, if you are in a higher income bracket, transferring assets to the trust can help to reach a lower tax bracket in terms of your net worth.
Potential Trust Drawbacks
While the trust can have plenty of benefits in terms of tax breaks, the downside is the attorney fees. The reason that this can be pricey is because a trust has to be written with a large amount of detail. Therefore, you will need to have an attorney that has specialized legal and financial knowledge, which can make it more expensive than other options in terms of upfront fees.
While there are other options out there, they may not give you the same control and options that a trust does. Plus, there are long term capabilities with a trust that you will not have with other estate planning options. There are also multiple options of trusts, from ones that deal with appreciating assets to your home or various life insurance policies.
However, you will want to keep in mind that setting up your trust may mean that you can possible deduction the fees that were part of the set up process. The IRS has some very specific regulations regarding this deduction, but if you can meet their regulations and show that you qualify, you can at least lower your personal income tax with this deduction.
Keep in mind that the deduction cannot be taken unless you choose to itemize your deductions. Therefore, if you choose to take the standard deduction, you will not be able to consider a deduction for your trust set up fees.
Other Options Available
If you think a trust may not be exactly the right fit for your needs, you can also consider a few other options. One of these is a will. While this does cost less money, your estate can be subject to more taxes and the terms may be contested during a probate period. You also will not be able to control how your assets are used and if the will is contested, your estate may be eaten up by attorney fees.
As you can see, trusts provide an option that can keep your assets available for your beneficiaries, while reducing your overall tax liability.
Click on the link below to connect with your tax professional or accountant in the office of EB TAX CONSULTANTS in BROOKLYN, NY, who can assist you in determining if a trust is the right option for you!
ERNIE BUSTAMANTE