Are trusts the key to generational wealth?

Those who are savvy with their investments and building wealth likely know about trusts. These legal tools can serve as part of an estate plan to help meet any number of goals. Depending on how the estate owner drafts the trust it can be tailored to protect against creditors and reduce an estate’s tax obligations.

When drafted wisely this legal tool could plan an important role in building generational wealth. Trusts can achieve this goal with two main benefits:

  • Reduce the estate’s federal estate tax
  • Reduce any inheritance tax to beneficiaries

The federal estate tax can apply to the transfer an estate. As noted within the name, this is a federal tax. The federal government does not currently tax one’s inheritance — but some states do.

What is the federal estate tax?

This tax rate varies and is currently set to apply to transfers to heirs during one’s life or death above $12.92 million in 2023. The tax on transfers of estates above this rate can range from 18% to 40%.

Those with an estate over this limit can reduce their estate to lower their tax obligations. An estate can achieve this goal in several ways including charitable donations and gifts. Estates can also transfer assets into a trust to hold the property. This means, for tax purposes, the property is no longer part of your taxable estate. Instead, the trust owns the property. The trust is viewed as a separate, taxable entity.

Does Kentucky have an inheritance tax?

Kentucky state law allows for an inheritance tax. The amount varies depending on factors like how the beneficiary was related to the owner of the estate and the amount of estate transferred. Transfers to a spouse are generally exempt.

It is important to note that trusts are very nuanced legal tools. Taxing authorities will look for ways to get around this legal structure and tax the estate. It is wise for those who seek to establish a trust to help build wealth seek legal counsel experienced with this niche area of estate planning law to better ensure it survives a challenge from taxing authorities like the Internal Revenue Service (IRS).


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