How could a trust legitimately lower the federal transfer tax liability of an estate?
The use of a trust may help you achieve certain goals, such as reduction of taxes. However, while trusts can offer a number of tax advantages, tax avoidance should not be the sole motivation for using this estate-planning tool.
It also should be recognized that the laws governing trusts and their taxation are complex and subject to change. As an example, under the Tax Reform Act of 1986, income earned in a trust which has a beneficiary under the age of 14 will be taxed at that beneficiary's marginal tax rate. This is a significant departure from prior tax law, which provided that such income be taxed to the child at his or her own tax rate, often resulting in little or no tax being due.
Because of the new tax rules, an individual contemplating a trust for tax purposes should consult with his or her accountant or attorney to determine whether the trust can be structured in a way to meet the tax objectives. By carefully choosing the proper type of investments within a trust, it may still be possible to accomplish tax goals, but careful planning and drafting are required. These facts, coupled with the numerous financial considerations involved in estate planning, suggest that professional legal and financial assistance may be necessary to help you make an informed decision.
Trust tax info provided by http://www.wsba.org/media/publications/pamphlets/trusts.htm
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