Individuals preparing estate plans that include trusts must understand the different tax implications to ensure that their surviving family members are taken care of and their assets are distributed according to their wishes. Trusts can be a convenient way to ensure a spouse or child is provided for over the long term. They allow a person to distribute wealth according to specific terms set forth and can often be more difficult to challenge than a will.
If the proper care is not taken when drawing up the estate plan, however, a trust can create an unnecessary financial burden. Bypass trusts, for example, are a special kind of irrevocable trust where the terms can be set so that the recipient is allowed to withdraw funds education, support, health or maintenance every year.
Bypass trusts have some tax advantages, including the transfer of assets into the trust by the grantor being tax free, and they allow the value of the assets being put in the trust to be taken off of the estate, meaning the value of the estate is lower. The problem with these types of trusts is that they can cause the trustee to have to pay a higher income tax amount.
While these types of trusts can certainly have their place, there are often better options depending on the individual circumstances surrounding a person’s estate planning needs. It is crucial for those in Massachusetts interested in establishing a trust to understand all of the pros and cons to make an informed decision about which kind of trust makes the most sense for their needs.
Source: LifeHealthPro, “Bypass trust tax problems: implications and solutions” Tom Nawrocki, Apr. 17, 2014
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