A trust will help lower the cost burden in the short term for beneficiaries of your trust (your family/friends) and may provide some shelter from the capital gains tax for your spouse on large assets in community property states.
One of the most common reasons for looking into estate planning, is to help avoid the tax burden on your spouse and children when you pass on. While a trust does provide some tax relief, simply recording a trust document and thinking that your spouse, kids, grand kids, and great grandkids are off the hook in perpetuity can lead to some problems down the road.
The first consideration should be: What exactly is the Estate Tax? Currently there is no estate tax for Texas estates. However, federal estate taxes still apply and for 2020, the estate tax limit is $11,580,000. That is, estates with gross assets under that amount, are not required to file a tax return (Form 706).
Additionally, if you do not use all of your exemption at your death, your surviving spouse may use your unused exemption at their death in combination with yours under the theory of “portability” and give themselves a roughly $22 million dollar exemption. Portability does require that the surviving spouse elect to use this tax advantage by filing with the IRS upon the death of the first spouse.
So what kind of trusts can we set up to avoid the estate taxes altogether? Avoiding estate taxes on property requires that the trust be “irrevocable.” This means that the property being placed in the trust is forever out of the ownership of the individual and cannot be taken back. Once property is taken out of your possession and placed in an Irrevocable Trust, the property is now no longer considered part of your estate for estate tax purposes.
Examples of Irrevocable Trusts that hold property are: Qualified Permanent Residence Trusts and Irrevocable Life Insurance Trusts that would hold your home and life insurance policies and proceeds, respectively.
When you utilize specific trusts to achieve certain outcomes, you can lessen the value of your estate when you pass on. Lowering this value allows for fewer taxes paid by your estate as well as your descendants and beneficiaries. There are several other factors that should be addressed by your estate planning attorney such as stepped up basis considerations and look back provisions for determining estate valuation and valuation dates. Click here to contact San Antonio Estate Planning Attorney Nathaniel Gilbert about planning your estate plan for tax purposes.