A trust can be a great way to minimize tax liability. It can also be a helpful tool in estate planning, allowing you to specify your wishes and protect your assets.

The first step is deciding what type of trust is right for you. A professional can help you determine the best type for your situation and goals.

Income Taxes

As many CPAs, attorneys, and financial advisers know, income taxes are one of the most significant issues faced by trusts. As a result, tax savings are often an essential consideration for many clients.

While avoiding income tax on trust distributions is not always possible, there are a few ways to minimize them. First, consider distributing some of the trust’s income (and capital gains) to an individual beneficiary.

This is an excellent strategy to use when the beneficiaries are young, or the trust is in the process of creating a special needs trust. Alternatively, it is also helpful when the trust beneficiaries are older, when they might be more concerned with estate and gift taxes or state death taxes on their share of the trust.

Using the trust for this purpose can save the substantial trustee money in the long run. In addition, it can allow the trustee to retain control over the distributions and not make them automatically to the beneficiaries.

Likewise, the trustee can suspend the beneficiary’s right to withdraw trust funds. For example, the trustee might do this because of a divorce, lawsuit, or a child’s educational expenses. Or the trustee might do this to encourage the beneficiary to take a specific action, such as getting a job or attending college.

Gift Taxes

One of the best ways to maximize tax savings on gift taxes is by using a trust. A trust is a fiduciary structure that allows you to give assets to someone for their future benefit without paying taxes on the gifts until they are transferred.

Another way to avoid gift taxes is by giving appreciated property instead of cash. If you make a gift of stock that has been enjoyed since the purchase, the IRS will only tax the amount the asset is worth when you give it away.

The key is to gift the correct type of assets and to make sure the gift will be received by a beneficiary eligible for the annual exclusion or who may have a future interest in the property.

Suppose you are still determining whether a particular asset is qualified to be gifted in this manner. In that case, consulting with an experienced attorney and a financial planner who understands the rules is essential.

In many cases, it is possible to avoid gift taxes on transferring investment property to a trust. This can be done by creating a charitable remainder trust, or CRT.

A CRT is a special kind of trust that pays back to the grantor, each year, a specified percentage of the entire trust property. At the end of the faith, the remaining trust property can either be used for the grantor’s benefit or transferred to charity.

Estate Taxes

A trust can be used in various ways to optimize estate tax savings. These techniques involve removing real estate, investments, or cash from your taxable estate.

A trust is a legal document specifying how your assets should be allocated to your beneficiaries after death. You can set up a revocable or irrevocable living or testamentary trust.

For example, you can set up a qualified personal residence trust to transfer your home after your death and allow your heirs to live there for several years. This can significantly reduce your estate taxes, Janko says.

However, one downside to these types of trusts is that they often can’t be changed after they are established. You should consult an attorney if you plan to use one of these trusts for estate tax purposes.

The most important thing is to make sure that the assets in a trust are adequately funded. That means you’ve put enough money into the trust to pay for its ongoing expenses and to provide some degree of return on your investment.

In addition, you should choose a trustee who’s knowledgeable about the terms of your trust—having someone well-informed can make managing your trust more efficient and ensure that everyone has clear directions about how they should use their assets after your death.

Inheritance Taxes

If you want to maximize tax savings on inheritance taxes, a trust is a great way to do it. It can also help you protect assets after a divorce, ensure that children get your money when you die and control how they spend the funds.

Another benefit of a trust is that it doesn’t have to go through probate, which can be costly and time-consuming. It also keeps your estate confidential and allows you to distribute assets to beneficiaries when you’re ready without worrying about heirs being exposed to public record, says Hutch Ashoo, the CEO of Moneta Financial Planning.

He adds that a trust is an excellent way to shelter assets from federal estate tax. “It’s a very effective and inexpensive strategy,” Ashoo says, adding that it can be used for business owners who want to avoid the tax or even for non-profits that need to raise capital.

Aside from avoiding estate tax, a trust can be an effective tool for diversifying your investments, which is often beneficial for investors with an extensive portfolio of assets. It can also help divert capital gains taxes on purchases likely to appreciate.

Another good way to save on inheritance taxes is using a grantor-retained annuity trust (GRAT). It’s often used for highly appreciated assets, like stocks or real estate, which may be subject to capital gains tax. A GRAT allows the owner of the assets to set up a trust that pays the holder some income for a certain number of years and then transfers the support when the term is up.