What is an exempt trust?

An exempt trust is an estate planning method used to reduce tax liability for gifts given, especially after death. When a person dies, their property, or the physical property, money, and other belongings they leave behind, are generally considered taxable by the government when transferred from the original owner to their heirs. One way to lessen the burden of death and inheritance taxes is to establish a trust, in which the original owner and his heirs hold assets jointly or individually, but separately from the owner's personal assets. There are two types of trusts: non-exempt trusts, which require payment of taxes on assets held by the trust at the time of transfer; and exempt trusts, which do not require the payment of taxes on the transfer of assets.

An exempt trust is often known by other names, such as an exempt trust. An exempt trust will place a couple's assets in a trust, or on behalf of a separate organization that has been created. The trust will hold the assets until one of the spouses dies; When the second spouse claims the assets, he will already have access to them through the trust, and will not be considered for taxes as heir to the assets or as transferred by the succession process. This method helps to reduce or eliminate the surviving spouse's tax liability.

An exempt trust works because neither spouse has access to the money until one of them dies, and neither spouse can withdraw funds from the principal balance, only interest or other earnings earned by the trust. By being taxed on the smallest amount earned by the trust, individuals effectively avoid a large one-time tax on the money balance when one of the spouses dies. After one dies, the second spouse will have access to the principal balance, allowing them to continue to live comfortably without having to pay a large portion of inherited money to the government or another tax office.

Exempt trusts are quite complex legal and tax structures. These trusts are best created with the help of a competent attorney and accountant. The specific rules and requirements of what must be done to establish an exempt trust may also vary by region, and a tax professional can explain these jurisdiction-specific rules.