An exempt trust works because neither spouse has access to the money until one of them has died.
An exempt trust is an estate planning method used to reduce tax liability for gifts given, especially in the event of death. When a person dies, his estate or physical property, money and other belongings he leaves behind are normally considered subject to taxation by the government when transferred from the original owner to his heirs. One way to lessen the burden of inheritance and death taxes is to establish a trust fund, where assets are held jointly or individually by the original owner and his heirs, but separately from the owner’s personal assets. There are two types of trusts: non-exempt trusts, which require the payment of taxes on the 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.
In an exempt trust, a couple’s assets will be placed in a trust.
An exempt trust is often known by other names, such as an exemption 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 then claims the assets, they will already have access to them through the trust, and will not be considered for tax purposes as having inherited the assets or having transferred them through the inheritance 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 either spouse 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 are effectively avoiding a large one-time tax on the money balance when one of the spouses dies. Upon the death of one, the second spouse will have access to the principal balance, which will allow him or her to continue to live comfortably without having to pay a large part of the inherited money to the government or other taxing agency.
Exempt trusts are quite complex legal and tax structures. These trusts are best established with the help of a competent attorney and accountant. Specific rules and requirements about what must be done to establish an exempt trust may also vary by region, and a tax professional can explain these jurisdiction-specific rules.