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Note: This is a complicated subject. We will only
touch on some topics. We recommend that you talk these issues over
with an attorney and a CPA.
How can a trust save on
income taxes?
How can trusts reduce probate costs?
How can I tell if my tax
person knows how to prepare a trust or estate income tax return?
How do credit shelter trusts
reduce estate (death) tax?
Do I need 3 trust documents? One to reduce probate costs and two to reduce
death taxes?
I
found a trust on the Internet. Can I use it instead of going to an
attorney?
Can a
CPA write a will or trust for me?
How can a CPA help me
with a trust?
How can a
trust save on income taxes?
This is a major point of confusion. Trusts rarely
save on income tax. The tax on $50,000 of trust income is much higher
than the tax on $50,000 of an individual's income. So why are trusts
used? Certain trusts can save on probate costs. Probate comes
into play when a person dies. Some trusts can reduce estate taxes
(death taxes). Other trusts can keep beneficiaries from burning
through money too fast.
How can a trust reduce probate costs?
Certain types of trusts, revocable
living trusts, can be used to avoid probate. When someone dies, the
legal and other fees associated with probate can be substantial.
Generally, assets in revocable living trusts stay out of probate. One
has to compare the potential probate costs against the cost of having an
attorney draft a trust. If you are young and healthy, you probably
don't need such a trust. However, if you own property in other states,
you could be facing probate in all of those states. Thus, if you have
significant property in other states, seriously consider a revocable trust.
If you are older and have significant assets that should go to relatives
instead of attorneys, consider a revocable trust.
How do
credit shelter trusts reduce estate (death) tax?
This is an over simplification! When someone dies with
significant assets, a credit to reduce estate taxes can be used. In
2006 that credit shelters $2,000,000 of net assets from tax.
Amounts gifted or inherited from one spouse to another
are exempt from estate tax. Without doing any analysis, that sounds
pretty good. Simply have the asset poor husband (no assets) inherit
everything from the asset rich wife ($10,000,000 in assets). No estate
tax! When the husband dies, he can shelter $2,000,000 of assets.
This brings the assets subject to tax down to $8,000,000.
But you can save another $2,000,000 of assets from death
tax by using credit shelter trusts. When the wife dies, $2,000,000 goes into
a properly setup trust that uses up her $2,000,000 exemption amount, and the
husband inherits $8,000,000. When the husband dies, $6,000,000 of
assets gets taxed.
Thus, using this trust strategy, $6,000,000 not
$8,000,000 of assets are taxed!
Do I
need 3 trust documents? One to reduce probate costs and two to reduce death
taxes?
No. One document can be used as the revocable trust to avoid
probate. The same document can be used to take maximum advantage of estate
tax credit.
I found a
trust on the Internet. Can I use it instead of going to an attorney?
I do not advise using a "canned trust". Trusts are
typically governed by state law. A perfectly good trust for someone in
California might have some problems for someone in Colorado.
Can a CPA
write a will or trust for me?
Only attorneys should draft trusts. A CPA, who isn't
also an attorney, could get in hot water by drawing up a trust for a client.
Any CPA, who isn't an attorney, that is willing to get himself in trouble by
practicing law is most likely to get you in trouble also!
How can a CPA help me
with a trust?
A CPA can prepare trust income tax returns. A CPA can
review trust document for tax consequences. A CPA can prepare tax returns
for taxpayers that are beneficiaries of trusts.
The information contained here are simplifications of complex subjects.
Trusts can do much more than what is discussed here. Talk to your CPA and
attorney if you want to pursue a trust.
If you have questions about this, do not hesitate to contact us
at 720-493-4804. A large portion of my business is preparing tax returns
and tax planning for trusts and beneficiaries of trusts.
US Estate Income Tax Return
US Estate Income Tax Return Instructions
Colorado Estate Income Tax Return |