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How funding an irrevocable trust can help with estate taxes

On Behalf of | Jul 30, 2024 | Estate Planning

Your estate plan should be crafted to best reflect your intentions and give your beneficiaries as many tax breaks as are legally possible for them. While they will not be the appropriate estate-planning vehicle for everyone’s needs, many trust grantors find that a well-designed trust marks off all the boxes on their checklist.

An irrevocable trust is a legal vehicle that’s created to hold assets for the benefit of its designated beneficiaries. Once established, the terms of an irrevocable trust cannot usually be altered without the consent of the beneficiaries. This rigidity is what provides the significant tax advantages associated with irrevocable trusts.

What are the benefits?

By transferring your assets into an irrevocable trust, you remove those assets from your taxable estate. This can drastically reduce or even eliminate the federal estate taxes your estate might otherwise owe, which, as of 2024, apply to estates exceeding $13.61 million for individuals or $27.22 million for married couples.

When you fund an irrevocable trust, you can also take advantage of the yearly gift tax exclusion. Under federal tax law, you can give up to $17,000 every year to each of your beneficiaries without any gift taxes. Over time, this strategy can transfer substantial wealth out of your estate and into the hands of your loved ones.

While the trust itself may be subject to higher income tax rates on the undistributed income it holds, the income distributed to its beneficiaries may potentially be subject to far lower individual tax rates. Careful planning with a tax advisor can create a strategy for these distributions to minimize the overall tax liability the beneficiaries have, which maximizes the money that they get to keep.

Ultimately, any thorough estate plan should keep in mind the tax liabilities that may come — and use careful planning to legally mitigate that particular expense.