A testamentary trust is any trust formed based upon terms contained in the settlor’s last will and testament. A testamentary trust is neither formed nor funded until death and does not exist for legal and tax purposes prior to that time.
An estate planning attorney determines the types of trusts to be used based upon the particular needs and goals of the family. Often an attorney may have several trust options capable of achieving their client’s goals. An attorney sometimes recognizes that a trust may only be needed if certain circumstances occur. As such, rather than form the trust immediately, the person forming the trust can include the terms of the trust in the last will and testament and delay the funding of the trust until the time of their death.
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If you have assets you anticipate will increase in value, you can “freeze” the value of those assets for estate tax purposes with an Intentionally Defective Grantor Trust, an “IDGT”. Most wonder why they would want an “intentionally defective” anything, but it references the fact your estate attorney will purposefully insert language making the transfer of assets to the trust an incomplete gift for income tax purposes but a complete gift for estate tax purposes. Therefore, immediately following the transfer to the IDGT, the IRS considers the trust’s assets to be owned by your heirs for estate tax purposes but still considered owned by you for income tax purposes. These differing classifications can be very beneficial for those with estate tax concerns, rather than a need for a step-up in basis at death.
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It’s common to hear attorneys and others refer to trusts, but you may not know exactly what they are or why they are needed. A trust is similar to an entity, such as a corporation or an LLC, in that a trust has a separate identity from either the person that formed it or the people it is intended to benefit. The trust may own property in its own name and may even have a separate tax ID for its dealings with the IRS.
Continue reading “What is a Trust? The Basics of Forming a Maryland Trust”