Can an Irrevocable Trust Save Me Excess Taxes?
An irrevocable trust can have many benefits, including saving you the excess tax on your hard-gained property. Most of us earn our living with the sweat and blood of our labor, and it hurts to pay excess taxes when transferring ownership of our life’s estate to our loved ones. While paying taxes is a national duty that we must not shy away from, sometimes the estate can be taxed at a very high rate if not managed right. An estate planning attorney familiar with your case is the right person to give you advice, but we can help along the process by providing the basic information you need.
Here are some basics about saving excess tax with an irrevocable trust on Long Island.
I have explained irrevocable trusts in quite some detail in another blog post, but I don’t mind revisiting the basics briefly. A trust is an agreement between a granter and a trustee to manage the estate for a third party, and the eventual recipient of the trust’s contents: the beneficiary. An irrevocable trust is a subtype that makes it impossible for the granter to take back or annul the benefits that have been assigned to the trust.
To make up for this particular trait, setting up an irrevocable trust on Long Island can have many benefits. Before choosing to embark on this road, you must consult with your lawyer—but for all intents and purposes, remember that you cannot modify, change, or remove the contents of an irrevocable trust.
An irrevocable trust can act as a tax-shelter and a protector of your assets. Plus, setting it up will take only a few meetings with your attorney. We suggest taking professional help as it is easy to get caught up in details such as obtaining a taxpayer identification number and creating a trust agreement amongst other tasks.
Property and Estate Taxes
First things first, if you want to transfer funds into an irrevocable fund, you should pay all taxes in full. The estate executor has several responsibilities which include remembering to pay the taxes on time! If you neglect your duty, the taxes are only going to add up. It may seem counter-productive to you, but there is no way to get around legitimate property taxes, and no lawyer can get you out of them. However, if you follow a good tax-paying ethic, you will likely be saved from surcharges and penalties. You can elect to hire an efficient estate planning attorney that knows the trade well and has the right advice for you.
The Gift Tax
We mentioned that some irrevocable trusts can be tax havens as they are set up as granter trusts—they just aren’t recognized as profitable resources liable for income tax. As for the gift tax, the New York State law permits people to make millions of dollars worth of gifts to their beneficiaries without paying taxes on it. It is often called deathbed gift gifting, a last minute transfer of assets for tax exemption.
The federal government has announced to raise the threshold value for tax exemption in 2020, proposing to make it a gigantic 11.58 million dollars. This means that up until the total value of your trust reaches that amount, you can leave it to your heirs without paying any taxes. And if you are a married couple, this threshold can double up to 23.16 million! For annual gifts exclusion is fixed at $15,000.
The Cons to Look Out For
As the name suggests, the contents of an irrevocable trust cannot be revoked once set up. This means that once you have decided to give your vacation house to your favorite niece, there’s no taking it back. In theory, you could try to change the ownership of the trust, but that is something you should take up with your estate planning attorney on Long Island.
Secondly, if you have transferred a money-making enterprise to the trust, all the proceeds are liable to be taxed separately from your estate. Plus, income tax from trust funds is charged at a slightly higher rate. For instance, if you have added an income-generating entity into the trust (an LLC or a business) it will be taxed separately.
Let’s cut down to the chase: it is entirely possible to save excess tax through an irrevocable trust when passing on your estate to your heirs. To make sure all loopholes are examined and the assets are managed properly, get in touch with a credible lawyer. If you want to set up an irrevocable trust on Long Island, we suggest that your bases be totally covered!