Using trust funds to minimize estate taxes

by Badgley Phelps | Sep 20, 2023

After a lifetime of accumulating and building wealth, there comes a time when your focus shifts to providing for your heirs, caring for loved ones, and supporting the causes important to you. Creating a trust fund (trust) is an important step in achieving these goals while preserving your legacy and sharing your values with future generations. Following is information about what trusts are, the two categories of trust funds, and how Badgley Phelps and its estate specialists can help you settle on a solution tailored to your needs.  

What is a trust?

A trust fund is a legal entity that holds property or assets for an individual, family, or organization. It’s a financial agreement between the trustor, the trustee, and the beneficiary. Trusts can hold property, money, a business, stocks, bonds, or a combination of these. In establishing a trust fund, the trustor’s assets are transferred to the trustee’s name, which can lead to significant savings for the trustor including potentially avoiding the 40 percent estate tax altogether.

Revocable trust versus irrevocable trust

There are two categories of trust funds: revocable and irrevocable. A revocable trust allows you to keep full control over your assets during your lifetime. It is flexible, can be changed at any time, and can be dissolved at any time. However, a revocable trust is treated as an asset during your lifetime, so you’d owe taxes on income generated, and it may be counted toward the value of your estate when you pass.

On the other hand, in an irrevocable trust, the assets pass out of your name and thus out of your estate. An irrevocable trust also allows you to protect assets from creditors and provide for family members who are financially dependent or under 18 years old. The potential drawback to this type of trust is in the name: the irrevocable trust cannot be changed or dissolved, and you lose direct control of your assets. These restrictions may well be worth it, though, when considering the estate tax savings. Another benefit of irrevocable trusts is that because your assets are now in the trust and not in your name, you are relieved of the tax liability on the income they generate.

Different types of irrevocable trusts can be selected for more specific goals.

  • Charitable lead and charitable remainder trusts allow certain assets to go to a charity.
  • A generation-skipping trust permits assets to be distributed to grandchildren or later generations and takes advantage of the generation-skipping tax exemption.
  • An irrevocable life insurance trust allows you to exclude life insurance proceeds from the deceased’s taxable estate.
  • A qualified personal residence trust will allow you to remove the value of a personal residence from the value of the estate.

These are just a few of the available options, and all irrevocable trusts work toward the goal of minimizing the estate tax.

How Badgley Phelps Can Help with your Trust Needs 

Badgley Phelps has an open architecture and uses a variety of paths to help clients find the best solution for their specific needs. This can include:

  • A local professional independent Trustee (either a solo practitioner or a boutique Trust company).
  • Education for a family or friend Trustee as to their requirements.
  • If more analysis is needed, we connect clients to a trust and estate specialist who can provide personalized legal advice. They work closely with the client and the Badgley advisor to analyze and then recommend a trustee solution, which can range from a local option to a national Trustee.

Contact us to discuss which trustee solution might be right for you.


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