When it comes to estate planning, you have two main options. The first option is one that most people are familiar with — a will. Alternatively, you can use a trust to pass on your belongings to your loved ones. There are several advantages a trust has over a will, including the ability to put conditions on who receives what, skipping the probate process, and avoiding estate taxation. However, the matter of whether trusts are taxed is a bit more complicated than many people realize. This guide will provide you with more information about this particular advantage of trusts.
The first step in distributing an estate is called probate. This is the process of handling all the administrative and financial aspects, as well as determining who the executor is. When an estate goes into probate, it is also subject to certain taxation. Generally, however, any items that are currently in a trust are immune from taxation.
The first thing you must realize is that trusts do not avoid taxation in every state. There are some states that specifically set it up so trusts are subject to taxation just like the rest of the estate. Secondly, you should evaluate how valuable skipping taxation really is. Generally, estate taxes are quite small.
Occasionally, however, an estate will be subject to an unusually large amount of taxation. In addition to this, there is usually a fee associated with setting up a trust. This fee is usually big enough that it minimizes or nullifies the benefits of avoiding taxation. An estate planning attorney can give you a better idea of how much your estate will be taxed, as well as how much you should expect to pay to set up a trust.
Is It Worth It?
So with all that in mind, is it worth it to set up a trust? It is generally not a good idea to set up a trust solely to avoid estate taxation. The other benefits of a trust are more worthwhile, so if you want to set conditions on your estate or pass your belongings on to your loved ones faster, a trust might be a good option.
Finally, you should not feel like you have to choose between a trust and a will. These are not mutually exclusive options. Everyone should have a will set up — regardless of whether they have a trust — but there are real benefits of a trust which might make one appealing alongside a will.