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An exempt trust is a way to reduce tax liability for gifts given, especially in the event of death. It places assets in a trust until one spouse dies, reducing or eliminating tax liability for the surviving spouse. It is a complex legal and tax structure that requires the help of a competent attorney and accountant.
An exempt trust is an estate planning method used to reduce tax liability for gifts given, especially in the event of death. When a person dies, his estate, or the physical property, cash, and other belongings he leaves behind, are generally considered taxable by the government when transferred from the original owner to his heirs. One way to lessen the burden of estate and death taxes is to establish a trust, in which the original owner and his or her heirs own the assets jointly or individually, but separately from the owner’s personal assets. There are two types of trusts: non-exempt trusts, which require payment of taxes on the assets held by the trust at the time of transfer; and exempt trusts, which do not require taxes to be paid upon transfer of assets.
An exempt trust is often known by other names, such as an exemption trust. An exempt trust will place the assets of a married couple in a trust, or in the name of a separate organization that has been created. The trust will hold the assets until one of the spouses dies; When the second spouse goes to claim the assets, he or she will already have access to them through the trust, and they will not be considered for taxes as inherited from the assets or as transferred through the inheritance process. This method helps reduce or eliminate the tax liability of the surviving spouse.
An exempt trust works because neither spouse has access to the money until one dies, and neither can remove funds from the principal balance, only from interest or other earnings earned by the trust. By being taxed on the lesser amount earned by the trust, people effectively avoid a large one-time tax on the balance of the money when one spouse dies. After one dies, the second spouse will have access to the principal balance, allowing them to continue living comfortably, without having to pay a large portion of the inherited money to the government or another tax office.
Exempt trusts are fairly complex legal and tax structures. Such trusts are best created with the help of a competent attorney and accountant. The specific rules and requirements for what must be done to establish an exempt trust may also vary by region, and a tax professional can explain these jurisdiction-specific rules.
Smart Assets.
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