Any type of trust you set up today can reduce your tax liability—and your heirs—when you die. Some trusts are arranged for individuals in special circumstances, while others are created to support a favorite charitable organization.
Using a trust to avoid estate taxes ranks high on the popularity chart. However, in spite of their popularity, trusts are expensive and complicated. Seeking professional estate planning guidance ensures that the type of trust you want to set up and how funds are disbursed remains true to your personal and financial goals. The average cost to start an irrevocable trust falls between $2,000 and $5,000, but some can go as high as $20,000.
How It Works
When you create a grantor-retained annuity trust (GRAT) you are arranging to have assets moved to an interest-bearing trust over five years. The Internal Revenue Service determines the interest rate. Payments made to you annually are calculated over the term so that the trust reaches a zero balance at the end of the term. With this arrangement you get your assets back, plus interest; any appreciation above that interest rate goes tax-free to your named beneficiaries of the trust.
Currently, the interest rate is a low 2.4 percent, making the GRAT an attractive way to park battered property and stocks, or other assets that have declined in this flagging economy. As the economy recovers, these trust owners expect to see as much as 50 percent appreciation in their GRAT assets, in addition to the interest it yielded.
When you set up a charitable lead trust, or CLT, your designated charity gets annual distributions and the balance goes to your heirs when it terms; should you set up a charitable remainder trust (CRT) you get annual distributions from the trust and the charity received the annuity balance when the trust terms out. Trusts come with an expiration date, so to speak, with most terming out at five years.
Other Types of Trusts
Other types of trusts are available as well, from supplemental needs trusts to testamentary trusts. The testamentary trusts are trusts created for a will. A supplemental needs trust is money set aside for disabled individuals, or those over 65. An asset protection trust is one that can help to protect assets from creditors.