Using a trust as part of your estate plan can provide tax benefits for your family during the probate process. However, effective use of a trust can also bring certain tax benefits directly to you during your lifetime.
Different types of trusts offer opportunities to manage income, reduce taxable estate value and take advantage of tax deductions. Establishing the right type of trust may result in significant financial advantages.
Reducing taxable income
Certain estate planning trusts can help reduce taxable income by shifting assets to beneficiaries or using deductions allowed by the IRS. For example, an irrevocable trust transfers ownership of assets, which can lower your taxable income because the trust becomes responsible for the taxes on any income generated. This shifts the tax obligation away from you and to the trust instead.
Minimizing estate taxes
Virginia does not impose a state-level estate tax, but federal estate taxes may apply to larger estates. Proper trust planning can remove assets from your estate, lowering the value subject to federal estate tax. An irrevocable life insurance trust can help by excluding life insurance proceeds from the taxable estate. This ensures beneficiaries receive the full benefit without facing unnecessary tax burdens.
Taking advantage of deductions
Trusts can allow for deductions related to charitable giving, medical expenses or educational funding. A charitable lead trust provides immediate contributions to a charity while preserving assets for future beneficiaries. A qualified personal residence trust allows for the transfer of your primary residence to a trust while still permitting you to live in the home for a set period. This reduces the home’s value in the taxable estate, leading to potential tax savings.
Protecting assets from taxation
Trusts offer protection against excessive taxation by managing how and when assets will distribute. Spendthrift trusts protect assets from creditors and reduce exposure to taxation by limiting distributions. Special needs trusts ensure individuals with disabilities receive financial support without affecting eligibility for government benefits while maintaining favorable tax treatment.