Can a Trust Help Me Avoid Washington State and Federal Estate Taxes?

Unlike many other states, Washington joins 16 other states and imposes its own estate taxes. Combined with federal estate taxes, this could cause concern for many residents – especially those approaching retirement and their twilight years. You may have heard that a trust can help avoid these estate taxes – but is there any truth to this? What are the advantages of such a strategy, and what are the downsides? These are questions you might want to explore with an experienced.

Federal Estate Tax Exemptions Are at Historically High Levels

First, consider that federal estate tax exemptions are currently quite high. The Tax Cuts and Jobs Act is expected to continue past its predetermined expiry or “sunsetting” in 2026 due to recent electoral results. The current exemption is $13.99 million, and this means that only high-net-worth individuals need to worry about paying federal estate taxes for the foreseeable future.

Why a Trust Can Protect Your Assets From Estate Taxes 

A trust provides protection against estate taxes because it is a separate legal entity. When you transfer assets into a trust, you no longer own those assets. As a result, your taxable estate decreases – and you become eligible for a lower amount of estate taxes. Many Washington residents use trusts to eliminate their estate tax burdens altogether.

Trusts Present Numerous Tax Implications 

Although trusts could help you save money on estate taxes, they could also increase capital gains taxes for your beneficiaries. This is in part due to IRS Rule 2023-2, which states that assets transferred to an irrevocable trust that are “complete” for estate tax purposes are no longer receive a “step-up in basis” after you pass away. Note: many irrevocable trusts used for long-term care and Medicaid planning are designed to be “incomplete” for estate tax purposes and do receive a basis step-up at death.

In other words, your beneficiaries could incur capital gains taxes if they inherit assets held in a trust rather than through your taxable estate. These capital gains taxes could be quite high, and it is something and experienced Yakima Estate Planning attorney can help you consider before transferring your assets into a trust.

There are also numerous implications associated with transferring your primary residence into a trust. This property represents the most lucrative asset in most families, and you might want to protect it from estate taxes. However, transferring your home into a trust could result in the loss of numerous tax breaks, homestead exemptions, and other benefits associated with primary residences.

At the end of the day, the pros and cons of using a trust to avoid estate taxes depend entirely on your unique situation.

Can a Yakima Estate Planning Lawyer Help With Trusts? 

If you are considering whether or not to establish a trust, schedule a consultation with an experienced estate planning lawyer in Yakima, Washington. These legal professionals can help you determine whether this is truly the most appropriate course of action based on your unique circumstances. If you decide to establish a trust, your estate planning attorney can help you begin this process. To learn more, contact Moulton Law Offices today.

Sources 

dor.wa.gov/taxes-rates/other-taxes/estate-tax

irs.gov/businesses/small-businesses-self-employed/estate-tax