How To Lower Your State Tax Liabilities With A Trust


State Tax Planning

Nationwide tax policy might garner the most media attention, but state tax liabilities should never be ignored. By concentrating solely on federal taxes, you risk missing out on opportunities to reduce your state tax burden. A trust can be a particularly useful tool for state tax planning, with the potential to generate significant tax savings.

Why Use A Trust?

A properly structured trust doesn’t merely lower your tax bill – it can protect your estate from creditors, and guard against mismanagement by your beneficiaries. Avoiding probate provides your heirs with faster access to your assets, sparing them the hassle and expense of probate court. Your successor trustee – the individual you choose to administer the trust after your death – simply transfers asset ownership to the beneficiaries named in the trust. Since probate is a matter of public record, avoiding it also enhances the privacy of your heirs.

How To Use A Trust

To avoid triggering estate taxes, you will need to form an irrevocable living trust. This removes your property from your possession and control, placing it in the hands of a trustee. While another individual must serve as your trustee, you may be the first beneficiary of the trust. You’re permitted to establish a disbursement schedule for trust assets, and provide instructions for the allocation of remaining funds after your death. Your trust can live on long after you’re gone, making regular payments to beneficiaries – or it can be dissolved, with the assets liquidated and disbursed according to your instructions.

Income Tax Planning

In recent years, tax rates have risen significantly in some states. In California, the highest tax bracket is currently 13.3%, while New York City has a combined city and state top income tax rate of 12.7%. The proper trust structure for state income tax avoidance varies from one state to the next, and is dependent upon how the state taxes income. A trust may be administered in any state – regardless of your state of residence – and establishing the trust in a state that doesn’t tax trust income can reduce or eliminate state income taxes. Your advisor can help you select a state with a favorable trust environment, keeping your wealth preservation goals on track.

To illustrate the potential savings, consider this hypothetical California stock sale:

Proceeds: $1,000,000

Cost Basis: $100,000

Capital Gain: $900,000

A California taxpayer in the highest bracket would face a tax liability of $119,700 from this transaction. Under the right circumstances, in a properly structured trust, this transaction would result in zero state income tax.

Estate Tax Planning

A few states – including New York, Connecticut, and Oregon – have estate tax filing thresholds much lower than the $5.25 million federal estate tax exemption amount. This means that an estate could very well incur estate tax liability in these states, even though no federal estate taxes are owed. Trusts can reduce these taxes, by sheltering assets from inclusion in a decedent’s taxable estate. This, in turn, decreases overall wealth transfer taxes for both present and future generations.

Trusts are flexible, customizable, and complex financial planning tools, and Werba Rubin understands how to use them to your advantage. We’re committed to helping you achieve your financial goals, with comprehensive solutions designed to meet your needs.

Tags: tax mitigation techniques, estate planning services san jose, wealth management san jose, certified financial planner in san jose, financial planning san jose

Advisor Services through Werba Rubin Advisory Services, LLC.Securities through Loring Ward Securities Inc., Member FINRA/SIPC #10-086 (04/10) © 2016 Werba Rubin Advisory Services, LLC

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