Estate planning involves making decisions about the management, preservation and distribution of your assets both during your lifetime and after your death. Many types of trusts exist and can meet various aims.
However, Texans doing their estate planning may find that establishing an irrevocable trust offers unique advantages tailored to their financial goals and family needs.
1. Tax efficiency and property ownership
Irrevocable trusts in Texas provide notable tax benefits, particularly concerning appreciated assets such as stock and real estate. By transferring ownership of these assets to the trust, the grantor can save on capital gains taxes. Moreover, the trust’s distinct tax identity shifts the income tax burden away from the grantor, as the trust becomes responsible for its own tax return.
2. Asset protection and probate simplification
One key feature of irrevocable trusts is shielding assets from external threats, such as creditors, liens or potential disputes during divorces. Once property is in the trust, it no longer belongs to the grantor. This can streamline the probate process, reducing both time and expenses.
3. Long-term care planning
For Texans contemplating future long-term care needs, an irrevocable trust can be a strategic tool. By transferring assets to the trust well in advance, typically at least five years before potential use, individuals can secure Medicaid benefits for nursing home care without jeopardizing their assets.
4. Estate tax savings
Texas does not have an estate tax, but the federal tax might apply. In 2024, the filing threshold is $13,610,000.
However, Texas residents with substantial estates may find solace in the estate tax savings that irrevocable trusts give. Since the grantor no longer owns the trust property, it does not count toward the estate’s total value at the time of death. This reduction in taxable estate value can be the difference between facing a significant tax bill or entirely avoiding estate taxes.
5. Flexibility
Various irrevocable trust options cater to specific needs. Texans may consider bypass trusts for estate tax reduction, irrevocable life insurance trusts for tax-efficient wealth transfer or special needs trusts to preserve government assistance for beneficiaries with disabilities.
This financial tool offers Texans a robust framework for secure and efficient estate management.