Do You Need a Trust to Protect Your Assets from Taxes?

by | Jan 31, 2023

Trusts are excellent vehicles for the reduction of the estate tax. Being as though the estate tax threshold changes periodically, it’s important to utilize these vehicles to maximize the amount of assets that you can remove from your estate for estate tax purposes. One of the best ways to do this is through a trust, using various techniques.

Trusts are governed by Chapter 736 in the Florida Statutes and can help you to avoid probate, guardianship, and reduce taxes at death. That being said, the question of whether you “need” a trust is an open one. There are numerous tools that are available to you, and trusts are just one.

In this post, we are going to examine several ways that you can be mindful of taxes while estate planning, including taking a deep dive into the factors you should consider before creating a trust. First, though, it’s important to look at which taxes are relevant to estate planning.


Taxes to Be Mindful of When Estate Planning


Hi, this is Barry Haimo. Thanks for tuning in again to another dose of Bite-Sized Bits of Knowledge, where we give you meaningful information in a short amount of time. Today, we’re going to talk about estate planning as it relates to taxes. The next video, we’re going to get a little bit more granular on income taxes. But for today, we’re going to talk about estate planning and taxes in general.

So, what taxes are relevant to estate planning? Number one, you have your estate tax and gift tax. Right now, the threshold to be subject to that tax is $11.6 million or so per spouse. So if you’re married, you can double it. What that means in English is that if you have $23 million, you really don’t have to worry about estate planning. $23 million or less, which translates to pretty much being 99% of the people don’t have to worry about it.

However, it’s a political figure. It changes. Twenty years ago, it was a million dollars. Anybody with over a million dollars was subject to this very adverse estate tax, which can be as high as 40%. It’s even higher than that before.

So, it was a million. It was two and three and a half and five – and it went away for a year, and it came back. And it went double. And now it’s eleven and change. Now, we just borrowed $2 trillion in debt. We need the money.

It seems to me inevitable that they’re going to lower that threshold to pick up more people to be subject to estate tax. So do not get too cozy with your estate tax exemption. Your gift taxes is a unified credit, meaning estate and gift taxes are unified. So if you give somebody a million dollars in cash, it just eats up some of your credit. And so you have less credit later unless you pay your taxes now, which nobody ever will do.

So that’s estate and gift taxes. There’s also something called generation-skipping transfer taxes, which is a fancy way of saying – people got cute and started to try to bypass the estate and gift tax by giving it to their grandkids so they would skip a generation. That generation-skipping process was picked up by the IRS. That generation-skipping ploy got picked up by the treasury, and they came up with a tax called the generation-skipping transfer tax, which basically said: you’re going to get taxed if you do that.

They got to get their money at the end of a generation, so you can’t skip it. That’s included in estate and gift tax planning. So, just kind of conceptually, put those together aside. Then there’s real estate taxes, which is unavoidable, but there’s also opportunity there, too.

And then income taxes. Income taxes are really where practitioners are focusing their attention now when it comes to estate planning. We’re talking about shifting income taxes now during life, and we’re also talking about – and more so – talking about minimizing, if not eliminating the taxes that your beneficiaries will pay. Your beneficiaries – you gift your kids money, they’re going to pay taxes on it somewhere or somehow, depending on what it is.

A lot of times people say, “Oh, we can accomplish a probate avoidance technique or a guardianship avoidance technique by putting people on title during life.” We get it all the time. It creates so many more problems that are unintended, like gift taxes, like liability exposure and income taxes. It’s a bad move. “But we did it.” We weren’t consulted first, so we just give them the bad news again. We can tell them – they can help them fix it. 

So again, estate planning is very much mindful of taxes. You don’t have to be rich to worry about it. It’s going to affect you at some point. It’s definitely going to affect your beneficiaries at some point. So I would encourage you to make sure that it’s part of your consideration.

Thank you for stopping by, and stay tuned for more.

Are There Techniques Available to Avoid or Reduce Estate Taxes?

Estate taxes can be quite expensive and take a large chunk out of your estate. However, with the help of a knowledgeable estate planning attorney, there are many techniques available that you can use to reduce and even avoid estate taxes entirely. Reducing the amount of taxes you have to pay on your estate enables you to leave more money and assets to your family, loved ones, and organizations you care about.

Below, we’ve listed some of the most common techniques to avoid or reduce federal estate taxes in Florida.

Gift giving. You may be able to minimize the taxes owed on your estate by reducing the size of your taxable estate – by giving away gifts. Under federal law, a gift is considered any transfer to a person or entity where full consideration in money or money’s value is not received in return. In 2022, you were allowed to give away up to $16,000 per year per person to as many recipients as you want without incurring the federal gift tax or affecting your lifetime gift tax exemption. This is referred to as the Annual Exclusion. If you are married, you and your spouse together may give up to $32,000 to each recipient, or double your annual exclusion. In 2023, the annual exclusion increases to $17,000 per person.

Alternate valuation. If you are a Florida resident, you may be able to take advantage of a strategy known as “alternation valuation.” With this strategy, your executor can decide to value your estate six months after your passing rather than the date of your debt. If your estate depreciates during these six months, this will minimize the amount it owes in taxes. Alternative valuation may be a good strategy to take if your estate includes substantial stock holdings that are likely to decrease in value in the six months following your death.   

Discounts. You can also get discounts on business entities that are structured properly to reflect the value reduction for being a minority owner and for having an inability to sell or market the shares (lack of marketability).

Asset Freezes. You can establish and fund irrevocable trusts that, in turn, legitimately purchase and acquire your assets from your estate. As a result of this transaction, your estate retains the fixed value of the promissory note rather than the potentially fluctuating and appreciating value of the asset.

Trusts. Certain types of trusts – such as irrevocable trusts and qualified personal residence trusts – allow you to remove the value of certain assets from your estate by transferring ownership to the trust. Much more on revocable and irrevocable trusts coming up in the next section.

Understanding Revocable and Irrevocable Trusts for Tax Purposes

Revocable and irrevocable trusts both have advantages, but there are many factors to consider before you decide which type of trust is best suited to your overall estate plan – or whether you want a trust at all.

A revocable trust is a document that you create to manage your assets throughout your lifetime and also to distribute your remaining assets after your death. The trust is considered “revocable” because you can change or terminate it during your lifetime as long as you aren’t incapacitated.

Assets such as bank accounts, investments, and real estate must be transferred to the trust before your death in order to get the maximum benefits from it. If your assets aren’t properly transferred to the trust, they may be subject to probate or guardianship.

Do I have to pay taxes on a revocable trust? A revocable trust is generally ignored for federal income taxes during your lifetime. You will report the income and deductions directly on your personal income tax return.

Since the assets in your revocable trust are considered your assets for income tax purposes, they are also treated as your assets for asset protection purposes. In other words, a revocable trust does not protect your assets if you are sued by your creditors.

At the time of your death, all of the assets held in the trust are subject to federal estate taxes and state inheritance laws.

Irrevocable trusts work a bit differently. An irrevocable trust is a type of trust that generally cannot be changed or terminated once the trust agreement has been signed. Revocable trusts typically become irrevocable after the grantor’s death or a designated time.

Assets in an irrevocable trust can include, but are not limited to, businesses, investments, cash, and life insurance policies. Once your assets are transferred to an irrevocable trust, you no longer own the assets in the trust, thereby removing your unfettered rights to use and enjoy the assets. 

If you are a trustee, you can still exercise a great degree of control of the assets.

Do I have to pay taxes on an irrevocable trust? Irrevocable trusts can be structured so that any assets in the trust will not be subject to estate tax after the creator’s death.

As you might imagine, because of this, irrevocable trusts are often created for tax mitigation and avoidance, as well as asset protection. Sometimes, these trusts are also utilized to solve issues caused by a complex family dynamic. In either case, these trusts must be both structured and administered properly to achieve your goals.

Creating a trust can help you accomplish your estate planning goals if you want to protect your assets from taxes or creditors. However, estate planning laws are complex and constantly changing, so it’s advisable to consult with a lawyer to learn about the different types of trusts and the most effective strategies available today to reduce estate taxes. An estate planning attorney can help you with this complicated decision to determine what will be the best solution for your specific needs and situation. Don’t hesitate to reach out to Haimo Law for advice.