A trust is an arrangement in which an individual or entity controls property or funds on behalf of someone else without actually owning them. This can be done for tax purposes or to ensure the depositor's wishes are carried out. For example, a deceased grandparent can give a gift to a favorite grandchild when the grandchild turns 18. This can be done by placing $10,000 into a trust, which is managed by a third individual with the age stipulation included in the agreement. (To learn more about these trusts, see Pick The Perfect Trust and Establishing A Revocable Living Trust.)

Trusts can be used in this way to reduce taxes when transferring property or funds. In an estate transfer to a surviving spouse, there are unlimited deductions, so taxes are not an issue. However, if the second spouse dies several years later and the combined estate that is transfered to the children turns out to be larger than the current exemption level, then a trust can help reduce federal estate taxes. By placing the first spouse's estate into a trust in which the manager is the second spouse, the estate of the first spouse is never actually transferred. Because there is no transfer, the second spouse's estate is separate from the trust when given to the children after death. If both the trust and the estate are under the exemption level, then there are federal tax savings.

For example, let's assume Joe and Beth are married and each holds an estate value of $3 million. Let's also assume the estate transfer exemption amount is $3.5 million where they live. Without a trust, if Joe dies and transfers his estate to his wife, then Beth is left with an estate worth $6 million. If Beth dies, the $6 million transfer will exceed the exemption level and taxes will be levied. If, on the other hand, Joe places his estate into a trust for his children, the trust would be independent of Beth's estate. As such, Beth could live off the funds in the trust until she died, then transfer her $3 million estate and the $3 million trust to the children, thus eliminating the tax burden. (For more on estate planning, check out Six Estate Planning Must-Haves and The Importance Of Estate And Contingency Planning.)

  1. Can I put my IRA in a trust?

    You cannot put your IRA in a trust while you are living. You can, however, name a trust as the beneficiary of your IRA and ... Read Full Answer >>
  2. How is cost basis calculated on an inherited asset?

    Typically, the cost basis on inherited assets is the fair market value as of the time of the decedent's death or actual transfer ... Read Full Answer >>
  3. How does the trust maker transfer funds into a revocable trust?

    Once a revocable trust is created, a trust maker transfers funds or property into the trust by including them in a list with ... Read Full Answer >>
  4. What is the difference between a revocable trust and a living trust?

    A revocable trust and living trust are separate terms that describe the same thing: a trust in which the terms can be changed ... Read Full Answer >>
  5. How exactly does one go about revoking a revocable trust?

    The basic steps involved in revoking a revocable trust are fairly simple, and include transfer of assets and an official ... Read Full Answer >>
  6. What is the difference between a revocable trust and an irrevocable trust?

    An irrevocable trust and a revocable trust are differentiated through the ability to change the trust. With an irrevocable ... Read Full Answer >>
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  1. Letter of Intent - LOI

    A document outlining the terms of an agreement before it is finalized. ...
  2. Wealth Management

    A high-level professional service that combines financial/investment ...
  3. See-Through Trust

    A trust that is treated as the beneficiary of an individual retirement ...
  4. Settlor

    The entity that establishes a trust. The settlor also goes by ...
  5. Personal Representative

    The executor or administrator for the estate of a deceased person. ...
  6. Contingent Beneficiary

    1. A beneficiary specified by an insurance contract holder who ...

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