Estate planning allows a family to gain increased control, management, and access to their valuable assets. A Family Trust can be used to distribute tax exemptions and liabilities for specific asset classes. Here are the tax benefits of a Family Trust.
Assets for Family Benefits
The Family Trust allows grandparents, parents, and children to gain superior control over their assets. Federal, state, and local taxation rules create different levels of exemptions and liabilities adhering to each taxpayer. The Family Trust permits family members to allocate their exemptions and funds in different estate portfolios.
During his lifetime, a parent will increase his income and purchase stocks, bonds, and real estate. Over time, this estate grows as well as the tax liability. A Family Trust allows the wealthy parent to distribute his assets and tax liabilities to his beneficiaries.
Every year, the Internal Revenue Service has different exemption limits. The wealthy estate planner can determine how much he wants to give his beneficiaries based on said exemption limitations. For example, he can consider the “individual lifetime federal gift tax exemption” and allocate his gifts to the Family Trust to remain under the limit.
Married Couple Portability
A married couple can use the Family Trust to distribute gifts to each other or their children based on federal and state tax exemptions. Using a Family Trust (Credit Shelter or AB Trust), the parents can transfer millions of dollars in assets without paying gift tax. They can designate the beneficiaries one by one and change the allocations to suit any changing needs. The ability to combine marital exemptions is called “portability.”
The government is really cracking down on any wealth transfer – it has even created a tax especially for grandparents. The generation-skipping transfer (GST) was established through the Tax Reform Act of 1986 to close any loopholes for families distributing their wealth across generations. This could either include:
-
A parent distribution to child and the child distribution to grandchild
-
The grandparent direct distribution to the grandchild
In either case, the Family Trust allows grandparents to avoid or reduce this tax liability.