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Chapter 4. Estate Planning > Defective Trusts

Defective Trusts

Generally, when you think of something as being defective, you think that is a bad thing. However, when it comes to estate planning, a Defective Trust just might be a good thing and save you a great deal of money that might otherwise be lost to estate and gift taxes.

For example, suppose you have some stock you want to give to your children or grandchildren. If you wait to give them that stock until you are quite old or bequeath it to them, the stock may have highly appreciated and the corresponding gift tax or estate tax could be large. Instead, you could set up a particular kind of trust called a Defective Trust. You could put the stock into the trust and name your children, grandchildren or whomever you wish as the beneficiaries of the trust. You would continue to pay the income taxes on any dividends earned by the stock rather than have the trust pay the income taxes at its higher rates. Then, at a specific time that you choose or at your death, the assets in the trust are distributed, without any further gift tax or estate tax to the beneficiaries whom you have named.


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