Estate owners who pay taxes prior to their estates being executed can help their beneficiaries. Every estate is called to pay taxes, so how much and when is dictated by the estate plan you have as a Maryland resident. A trust is a common estate tool that reduces taxes and even eliminates them in some cases. While avoiding taxes might be an option, it’s often best to predetermine your tax liability now and strive to pay it. Here’s how you do that with a legal trust.
The intentionally defective grantor trust
By disqualifying parts of your estate, an intentionally defective grantor trust, or IDGT, enables the assets you list to grow tax-free. This loophole in estate taxation requires you to relinquish your rights to the chosen assets from within a trust. The now defective assets won’t trigger an income tax if they produce gains beyond your principal investment. Additionally, defective assets in this trust avoid estate taxes.
An IDGT freezes assets to save their initial values, allowing their gains to go unaccounted for. When the IRS accounts for estate assets, dates and maturities get examined. The value of an asset when you enter it into a trust is what’s used when that asset, years later, is owned by a beneficiary. This means that the profits from an asset, being defective from you, remain tax-free. What you invested into the trust might be taxable, but gains don’t have to be.
Trusts in Maryland
As a grantor of a trust, you don’t have to retain the rights to a trust’s assets although you own the actual trust. The assets you place into a trust are protected during your life, but you need a beneficiary in place. Though capital gains and income are taxable in common cases, the profits held within a trust remain accountable only to that trust. Your chosen trustee can then offer more security by only releasing gains when the principal of the trust isn’t at stake.