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Trusts and taxes - how can Michigan residents benefit?

When it comes to tax planning, most Michigan residents probably all have the same goal: pay as little in taxes as possible. That can be easier said than done these days, especially with the uncertainty coming from the federal government over what exactly the tax structure of future years, or even next year, will be. However, one thing that our Michigan readers can be sure of is what the taxes for this year, 2012, will be. And, many may not be aware of a creative way to begin structuring their tax requirements around the use of trusts.

As some of the readers of our previous posts may know, trusts can be one of the best methods of protecting inheritance and making sure that estate distributions are made exactly as an individual desires. Right now, there is a federal gift and estate tax exemption for 2012, which is set to expire at the end of the year. For those looking to take full advantage of the exemption before it expires, one particular estate planning device they may want to consider is the Intentionally Defective Grantor Trust.

An IDGT allows an individual who owns property or assets which provide them with an income to transfer that property or asset to the trust, usually for the future benefit of their chosen heirs, but also allows them to continue to receive the income the property or asset provides. In essence, the gift is given completely, as it would be if that was the wish of the planner upon death, but now the value that may accumulate in the trust is not subject to the gift and estate tax. Also, the grantor will continue to receive the income from the property or asset, paying the usual income tax rate on the money he receives.

Trusts can be complicated, but sometimes looking into all of the options they provide can save a family a lot of money, which may otherwise be paid in taxes. When it comes to considering the options trusts provide, it is important to get the right information to set out the best possible estate plan.

Source: The Wall Street Journal, "Reducing Estate Taxes With a 'Defective' Trust," Harper Willis, Nov. 13, 2012

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