3 Trust Ideas for Reducing Estate Taxes

Trusts are an effective way to protect assets from tax, creditors and other forces seeking to take a piece of what your clients have built over their lifetimes. Here are three worth considering carefully: 

Charitable Remainder Trust: 

This kind of trust provides two big benefits .First, it creates a place for them to donate assets (that might be burdened with high capital gains), giving them an immediate charitable deduction. Second, the trust generates regular income for the client, while remaining tax-free. Upon death, the remainder of the trust goes to the charitable organization, also tax-free. For charity-minded clients, this is the best of both worlds, allowing them to benefit from their assets, while also giving back.

 Domestic Asset Protection Trust (DAPT): 

A DAPT is an irrevocable trust that is set up under the laws of the states, allowing a person to be a discretionary beneficiary of his/her own trust without creditors being able to access it. This means the trust is safe from a wide spectrum of threats, including divorce, bankruptcy and taxes. However, not all jurisdictions are equal in this regard. It’s important to choose a state with a short statute of limitations, and one where no statutory exception creditors have access. 

Dynasty Trust:

In all the tax reform talk about a potential repeal of the estate tax, it is sometimes lost that the GST, or Generation Skipping Tax, and Gift Tax will likely still exist. Clients wishing to leave a legacy to future generations of their family could suffer significant burdens from both taxes as they work to pass on their wealth. A dynasty trust is set up so that the trust can make discretionary distributions that avoid the GST. Numerous benefits include protection from estate tax, creditors, divorce, direct decedents and spendthrifts. Additionally, it allows for a consolidation of client capital. 

Injured Spouse Relief: Qualifications & How to Apply

Did you file a tax return only to have your refund applied toward debt that your spouse owed? Or, you know your refund will be subject to your spouse’s debt, do you know what your rights are? If either of these scenarios relate to you, you are considered and injured spouse and you can do something to get your portion of the tax refund awarded to you.

Debts The IRS Can Withhold From Your Tax Refund

Debts that can be withheld from your tax return include the following:

• Past due federal or state tax.
• Past due child or spousal support payments.
• Other federal non-tax debt including student loans.

How Do You Know If You Are An Injured Spouse?

According to the IRS website in order for you to qualify as an injured spouse you first must have filed a joint return with your spouse. Second, you must have reported taxable earnings that show you had income tax withheld during the tax year or paid estimate tax payments. You can also qualify if you were able to claim a tax refund credit including the child tax credit or an earned income credit.

Additionally, you must not be legally responsible for any of the past due amount. The money owed must either be linked to your spouse from before you were married or be solely their responsibility. If you owe the debt jointly, you will not qualify for the injured spouse tax relief.

What Else Do I Need To Know?

• Special rules apply for some injured spouses, specifically those that live in a community property state. If you live in a community property state and believe you are an injured spouse, please refer to IRS publication 555 in order to understand your rights.
• If you qualify as an injured spouse you are entitled to only a portion of what your joint tax return would have been.
• You can file for injured spouse relief in one of two ways. If you know ahead of time that your return will be subject to paying off your spouse’s debt, you can file for the relief right with your tax return. You are also able to file for spousal relief after you have already submitted your return to the IRS.

What Forms Do I Need To Fill Out

In order to claim injured spouse tax relief you will need to fill out and file IRS form 8379 for injured spouse allocation. You can file the form either electronically or by mail. If you are filing a paper return and plan to include form 8379 with your return, the IRS asks that you write “Injured Spouse” in the upper top left corner of your 1040, 1040A or 1040EZ form.

If have already filed your tax return and are filing form 8379 by itself you will need to make sure that you include on the form both yours and your spouse’s social security numbers and list them in the same order that you listed them on your original return. Additionally, both parties must sign the form.Include the copies of W2 and other Tax Document which have federal withholding . 

Processing Time 

Generally: If you file Form 8379 with a joint return electronically, the time needed to process it is about 11 weeks. If you file Form 8379 with a joint return on paper, the time needed is about 14 weeks. If you file Form 8379 by itself after a joint return has already been processed, the time needed is about 8 weeks