How a Family Can Save Money by Creating an Estate Plan with a Tax Plan

When many people think of estate planning, they think about having a will that directs the distribution of their property after death. They may think of using an estate plan to prevent the need for guardianship, avoid probate, or even help pay for long-term care costs. Rarely do people consider how a comprehensive estate plan can save considerably on tax burdens, and that is a mistake.

Unlike other states, Massachusetts has an estate tax, a tax that effects a surprising number of families, given the high value of real estate in our region. A skillfully prepared estate plan can help your family avoid or reduce estate tax liability. Additionally, plans can also reduce income taxes and other forms of taxation, depending on your situation.

Using a Revocable Living Trust to Save on Taxes

While most people know that a revocable living trust can save considerable legal fees when an individual passes away, they do not realize that these trusts can include provisions to reduce estate tax liability. The way this often works for couples is that each partner’s trust directs the successor trustee to set aside a separate account with the exempt amount in it. The goal is to keep the assets in that separate account out of the surviving partner’s estate when they pass away.

For this sub-trust, income might go to the spouse while the principal goes to the spouse and descendants for their “health, education, maintenance, and support.” This allows beneficiaries to enjoy assets that could potentially provide them with a similar style of living enjoyed by the beneficiary.

Irrevocable Trusts Can Reduce Taxes in a Variety of Ways

For estates with significant assets, estate planning attorneys can create different types of irrevocable trusts that reduce income tax liability as well as estate tax burdens in the future. Property transferred into an irrevocable trust cannot be removed by the grantor, and the grantor also cannot usually change any terms of the trust, so it is “written in stone” in many ways. However, that inflexibility gives this type of trust the strength to shield assets from taxation and depletion in other ways.

For instance, if you set up a charitable trust, money put into the trust reduces income tax liability and eventually decreases the amount of money in the estate, which also reduces the potential for estate tax liability. Whether you set up a charitable lead trust or a charitable remainder trust, you gain the satisfaction of supporting a cherished cause, providing funds for loved ones, and reducing potential tax bills.

Another type of irrevocable trust commonly used to reduce estate tax liability in Massachusetts is an irrevocable life insurance trust. Although the beneficiaries of a life insurance policy do not pay income taxes on the benefits they receive, proceeds from life insurance are included in the estate for the purposes of Massachusetts estate taxes. With a life insurance trust, however, the proceeds do not become part of the estate but are distributed to beneficiaries separately.

Find Out How Casey Lundregan Burns, P.C. Can Help You Save on Taxes

Trusts are not the only option in estate planning that can reduce your tax burden. Depending on your situation, we might also recommend a gifting strategy or other methods of accomplishing your planning goals while also saving money on taxes.

Your life is unique, and your plan will be also. For that reason, we invite you to schedule a consultation with our team to learn about the specific assistance we can provide in your situation. We have been helping families protect their assets for more than 90 years, and we look forward to helping you keep more for your family.