People often come to us curious—or confused—about the role trusts play in saving on taxes. Given how frequently this issue comes up, we’re going to explain the tax implications associated with different types of trusts in order to clarify this issue. Of course, if you need further clarification about trusts, taxes, or any other issue related to estate planning, meet with us, for additional guidance.
There are two primary types of trusts which included revocable trusts and irrevocable trusts. Each one of these comes with different tax consequences.
A revocable trust is a living trust created during your lifetime, and is by far the most commonly used form of trusts in estate planning. This is primarily true because you can transfer your assets to this trust, manage them yourself as trustee, and decide if you want to keep them there or take them out as a beneficiary. And, as long as you are living, there is absolutely no tax impact when creating a revocable trust.
A revocable trust uses your own Social Security Number as its tax identifier, and this type of trust is not a separate entity from you for tax purposes. So while you are living, nothing really changes as far as your taxes are concerned. However, a revocable trust is a separate entity from you for the purpose of avoiding the court process called probate, and this is often where the confusion regarding taxes comes from. When you have a revocable trust prepared, any of your assets transferred to that trust will bypass the probate process and will prevent your beneficiaries from having to go to court to obtain the legal authority to make financial decisions for you if you cannot make them for yourself.
An irrevocable trust is created and established when you make a transfer to this trust as gift. Another person serves as the trustee who holds your assets in the irrevocable trust for the beneficiary(ies), and you cannot take back the gift you’ve made to the irrevocable trust for that trustee to manage. It is important to note that any type of trust you create, whether revocable or irrevocable serves as a probate avoidance and incapacity planning tool that can spare your loved ones untold grief, time, attention and money.
When you create an irrevocable trust, either during your lifetime (also known as a living trust), or at death through a testamentary trust (a trust that becomes operational at the time of your death through your will), or if you place in a revocable trust during your lifetime (which goes into effect after your death), the irrevocable trust is a separate tax-paying entity, and it is either subject to income tax on the earnings of the trust assets at the trust tax rates or at the income tax rates of the individual beneficiaries, depending on how the irrevocable trust is structured.
The estate tax is a death tax on the value of a person’s assets at the time of their passing. Upon your death, if the total value of your estate is above a certain threshold amount, known as the federal estate tax exemption, the IRS requires your estate to pay a tax, known as the estate tax, before any assets can be passed to your beneficiaries.
As of 2022, the federal estate tax exemption is $12.06 million for individuals ($24.12 million for married couples). Simply put, if someone dies in 2022, and their assets are worth $12.06 million or less, their estate won’t owe any federal estate tax. However, if their estate is worth more than $12.06 million, the amount of their assets that are greater than $12.06 million will be taxed at a whopping 40% tax rate. Although most people are not subject to this tax, the high exemption amount is schedule to decrease.
You can reduce your estate tax liability—or even eliminate it all together—by using various estate planning strategies. Most of these strategies are fairly complex and involve the use of irrevocable trusts, but such strategies are without question worth it, if you can save your family such a massive tax bill. To learn how to save your family from such a major tax burden, meet with us to discuss your options.
Monet Binder, Esq., has her practice in Queens, dedicated to protecting families, their legacies, and values. All halachic documents are approved by the Bais Havaad Halacha Center in Lakewood, under the direction of Rabbi Dovid Grossman and the guidance of Harav Shmuel Kaminetsky, shlita, as well as other leading halachic authorities. To learn more about how a power of attorney can help you, you can send her an email at This email address is being protected from spambots. You need JavaScript enabled to view it. or call 718-514-7575.
