Individuals who have accrued a considerable amount of wealth throughout their lives may have reason to be concerned about their taxable estate. Some California residents may exceed the exemption limit and their estate could face taxation after their passing. As a result, reducing estate taxes may be something that interests them, and trusts could help.
One trust to consider is an intentionally defective grantor trust. A grantor trust is commonly a revocable living trust that allows the grantor to act as the trustee. The grantor also handles the tax obligations resulting from the trust, including income and estate taxes. However, an IDGT is an irrevocable trust that allows the grantor to remain the owner of the assets as long as he or she meets certain requirements under the Internal Revenue Code.
This option may be appealing because it allows the grantor to maintain ownership of the assets and also provides protection from estate taxes. When using an IDGT, the grantor would report the income tax generated by the trust on his or her personal tax return, but when the grantor passes away, the assets are not considered part of his or her estate. As a result, those assets are not included when calculating estate taxes.
Reducing estate taxes can better ensure that hard-earned money remains in the family rather than being relinquished for taxes. If California residents are interested in reducing the future tax obligations of their estate, they may wish to consider an IDGT. Discussing this and other trust options with knowledgeable estate planning attorneys could help interested parties find their best options.