The federal estate tax looms large for people who have been successful throughout their lives. At the current time the maximum rate of the estate tax is 40%, and the lifetime exclusion is $5.25 million.
There are various different recommendations that astute estate planning lawyers can make for people who are faced with the prospect of paying the estate tax. Some types of trusts will provide tax advantages, and one of them is the intentionally defective trust.
Of course the first thing that is probably going to come to your mind when you hear about intentionally defective trusts is the question of why you would want to create something that is defective. In fact, these trusts are actually quite effective in spite of the name.
The reason why they are designated as defective is because the purpose of most trusts is to separate the individual from the trust entity. An intentionally defective trust is specifically designed to keep the grantor responsible for paying income taxes on the trust’s earnings, and this is theoretically the defect.
The benefit lies in the fact that resources that were conveyed into the intentionally defective trust are no longer part of the taxable estate of the grantor. And, since the grantor is paying the taxes on the earnings the resources that have been placed into the trust for the benefit a family member or members can grow continually without being eroded by tax levies.
Intentionally defective trusts can be a good option for many people, and you may want to discuss these devices with your attorney at your next consultation if you’re interested in tax efficiency strategies.