You may already know the basics about how trusts can help protect your estate from taxes while helping you control where your money goes. Most of these decisions will happen with you, your family and your Financial Advisor, but to help you begin to get a clearer understanding of how you can help protect your assets, here are four types of trusts and a general summary how they work.
1: An irrevocable gift trust. This type of trust can help you pass along assets to your beneficiaries and heirs while easing the tax burden they might face should the asset increase in value. Use this trust to pass on assets that you expect to appreciate. The value of the assets when you contribute them will count against your lifetime tax exemption ($5.45 million in 2016), but any appreciation won’t be subject to gift or estate taxes. “Say you have a closely held business in the start-up stage and you’re convinced it will have spectacular growth,” says David English, professor of law at the University of Missouri School of Law and vice-chair of the American Bar Association’s section of real property, trust and estate law. “You can freeze the value of that business on the date you put it in trust, and any appreciation of the business will escape federal estate tax.
- Trusts can help protect your assets from estate and inheritance taxes.
- An irrevocable gift trust works well if you have assets that are likely to appreciate.
- A qualified personal residence trust allows you to put your home in trust and still live in it for a specified number of years, which lets you pass it on to beneficiaries at a discounted value.
- A grantor-retained annuity trust lets you transfer appreciation of assets to the next generation tax-free.
- A dynasty or multi-generational trust may allow you to pass wealth to grandchildren free of tax, up to $5.45 million in 2016.
2: A qualified personal residence trust (QPRT). This type of trust can make it easier to pass down your home. A QPRT can hold your primary or secondary residence. Unlike most irrevocable trusts, a QPRT allows you to retain use of the asset. In this case, you’re entitled to live in the home for a certain number of years. At the end of the trust, the house passes to your beneficiaries at a much-discounted value, using up only a fraction of the gift tax exclusion you would have used had you given the house outright. In addition, you can continue to live in the house if you pay a fair rent to your beneficiaries, which allows you to pass even more tax-free wealth to them, because fair market rent is not a gift.