Frequently Asked Questions About Trusts
The trusts we do are designed to protect your heirs (the people you give your money to after you die) from their creditors prior to their receiving the funds (with respect to the money you give them), but not you. See Asset Protection.
Your income taxes remain the same whether or not you have a trust of the type we do. As far as the IRS is concerned you own the assets whether or not they are in a trust. Nevada's governments will tax your real estate the same whether or not it is in a trust.
Nevada does not tax your estate when you die. As of this writing in July of 2010, the federal estate for people dying in 2010 does not exist but will be re-instated for people dying in 2011 and later. The tax is steep and applies, under current law, to estates over one million dollars. It is expected that Congress will raise this amount before the end of the year. For example, for people dying in 2009 the first $3,500,000 of an estate was tax free. Our firm does not design trusts to minimize the federal estate tax or give advice on other ways to minimize the federal estate tax. Expect to pay thousands of dollars for trusts designed to accomplish this expect to pay for expensive annual reviews and amendments as the tax law keeps changing. If you are concerned about federal estate taxes we will be happy to recommend an excellent law firm.
Typically when you set up your IRA or 401(k) or other retirement plan you filled out forms listing a primary and secondary beneficiary. For example, a couple is married and has 3 adult children. Each spouse probably listed the other as primary beneficiary on their IRA and the 3 adult children in equal shares as the secondary beneficiary. For many people leaving this arrangement alone even after writing a trust makes good sense. The designation of the primary and secondary beneficiaries means that when you die your IRA won't have to go through Probate (unless your primary and secondary beneficiaries predecease you.)
But, suppose the primary beneficiary is a minor, for example, you are a single parent with minor children and a large IRA. And, suppose, also, that you would not want this minor to receive the entire IRA amount at age 18. In that case you could name the trust as the beneficiary. That would allow for your successor trustee to dole out the money to minor according to guidelines you set up as discussed above in "Providing for Minors and Young Adults" but see the section below.
What Are The Tax Implications of my Trust?
At Reed & Mansfield we don't give tax advice. However, there are 3 basic tax issues to be aware of:
- The trusts we write don't affect your income tax situation. As far as the IRS is concerned, your assets are your assets whether they are in a trust we write or not.
- Money in an IRA (whether regular or Roth) has special tax status, for example, investment income earned in the IRA is not presently taxable. In addition, there is tax owed when there is a distribution from a regular IRA. If an IRA is left out of a trust and you die your beneficiary MAY be able to roll over your IRA into theirs, or take the money out of the IRA over time. But if your trust is named as a beneficiary of the IRA this potential tax benefit disappears.
- "Wealthy" people have traditionally used complicated trusts to minimize or avoid the federal estate tax in transferring money from themselves to their children or grandchildren. These complicated trusts cost much, much more than we charge for a trust and probably tie you into expensive annual updates with your trust attorney. Are you a "wealthy" person who should spend all of this extra money to avoid federal estate tax when you die? See Death Transfer Fees.