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Trusts and Taxes, Trusts and Taxes Go Together Like….Wait! No They Don’t


A number of our clients have a trust as the main document in their estate plan. Some of them created a trust before ever talking with Crain & Wooley and were not educated on how a properly crafted trust works. For example, some people never put anything in their trust (attorneys call that funding the trust). One reason people say they didn’t fund their trust is that they didn’t know they should. Another common reason people say they didn’t put anything in their trust is they were afraid it would negatively impact their taxes.

It is extremely important that you make sure your assets are part of your trust. If your trust does not hold any assets, your trust is not doing anything! Only assets held in the trust are subject to the provisions of your trust. You must place assets in your trust. Your attorney should help you to understand how your trust works and explain to you how your trust will affect your taxes once the trust holds your assets.

For those concerned that you would lose your homestead exemption (or 65 and older exemption, or other tax exemptions) if you put your house in a trust – you don’t have to worry! If your Trust and accompanying legal documents are drafted properly, you do not lose your tax exemptions on your house if your house is in your trust.

If you are the owner of the house and you create a trust that you stay in charge of as trustee, the law is on your side. Some clients have come to me thinking that they can’t put their house in their trust until they pay the mortgage loan off. The good news for that situation is that you can put your house in your trust even if it is currently subject to a mortgage, without triggering any due on sale clauses. You should not wait to put assets in your trust because you might wait until it is too late.

For those concerned that a trust may cause your tax rate to be much higher due to trust tax rates – you don’t have to be concerned either! If drafted properly, your trust can be considered a pass-through entity and your tax rates will be the same both before and after your trust is in place.

Don’t let tax concerns or lack of knowledge prevent you from enjoying the benefits of a properly drafted and executed trust. Whether it is your first trust or you are updating an existing trust – you should work with a legal professional who can help to educate and guide you through the proper creation and effective use of this important legal tool.

Have questions? Contact us today!

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