Accounting Articles > Trusts:
What is a trust?
A trust is a living, breathing entity under the law, which holds an asset or group of assets.
The most common misunderstanding is that you do not need to own an asset in order to control it or to be able to profit from it. Why is this important? From an estate planning perspective, if you don't own it, it isn't part of your estate. If it isn't part of your estate, it isn't subject to estate taxes.
Let's use an example. If your estate is valued at $3,000,000 and the estate tax credit is $2,000,000, then we need to get the value of the estate to less than $2,000,000, so that there will not be any estate taxes. Let's also say that one of the assets in your estate is a piece of real estate worth $1,300,000.
One of the ways to handle this situation is to put the property into a trust. I'm not going to get into what type of trust, as there are at least 16 different types, depending on how you count them. But the basic concept is this. We transfer ownership of the parcel from you to trust #12345 at Blank National Bank. You are the trustee. Like the president of a corporation you still control the asset. You can still profit from the asset, taking out trustee fees.
At the time of your death, you pass along the asset by designating a new trustee. If you want the asset to go to more than one person, you set up a joint trusteeship.
What's the catch? Taxes. Income taxes on trusts are high. Currently, at the Federal level alone, a trust begins paying income tax at $2,050 in income (15%), and goes into the highest tax bracket at $10,050 (35%). From a tax planning perspective, you probably want to get the income out of the trust prior to the year's end, as taxes are much lower at the individual level. But even the income tax on a trust is usually pennies on the dollar compared to what the estate tax would have been.
As a tool for estate planning, trusts are always an option to discuss with your accountant.
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