The current global pandemic has brought up financial concerns for many residents of Pennsylvania, one of which is how to ensure that a child’s inheritance will stay safe. Though you cannot control the stock market, there are measures you can take to minimize the amount of taxes and costs that your loved ones will pay after you are gone, such as creating a trust fund.
Types of trust funds
Trust funds are either living or testamentary. Living trusts are created within a person’s lifetime, and testamentary trusts do not come into effect until after the grantor, the person drafting the trust, dies. Within living trusts, there are revocable and irrevocable trusts, and irrevocable trusts can either be simple or complex. Revocable trusts are better if a grantor anticipates making additions to the trust in his or her lifetime, such as adding property or naming additional beneficiaries. However, these trusts have limited tax benefits.
Tax benefits of an irrevocable trust
Assets or property put into a revocable trust are still considered part of the grantor’s estate. With an irrevocable trust, those assets are gifted to the trust, meaning the grantor will not have to pay taxes on those assets during his or her life. If assets in an irrevocable trust generate income or interest, there are a couple of ways it can be taxed. If the trust is a simple one, interest and income are distributed to beneficiaries and taxed at the beneficiaries’ tax rates. With complex trusts, the interest and income can either be distributed to the beneficiaries or retained by the trust, in which case the trust pays the taxes on the income and interest generated.
Planning to open a trust
Setting up a trust may be relatively easy when working with an experienced estate planning attorney, but you should do some preparation in advance of setting up a trust. First, you should create a list of all of your property and debt and start thinking about whom you want to designate as beneficiaries. Accounting for all valuables in a trust helps ensure that beneficiaries will not have to spend time and money in probate figuring out who gets what.