Corporation vs. Living Trust

Corporation vs. Living Trust
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Many people work to have the resources to not only enjoy retirement, but to pass something on to their heirs. There are many ways to approach planning your estate, each with pros and cons. Many people create living trusts to pass assets on after death. Family corporations are another way to create longevity of assets. A corporation and a living trust are non-human entities but are recognized as having legal rights and duties.

Structure

A living trust starts with a document that contains information regarding what assets are owned by the trust, how these assets are to be managed and to whom the assets will be transferred at a future date. It is called a living trust because it is created while the grantor (the person giving the assets to the trust) is alive and can be revoked during his lifetime.

A corporation is owned by stockholders, either privately or publicly acquired. Ownership of stock can be transferred by any one stockholder. A corporation is run by a board of directors that dictates how the company is managed and how assets are used and distributed.

Function

A living trust allows assets to be passed to heirs without going through probate. It is designed to help reduce conflict among heirs as well as lessen the costs associated with inheriting money. Corporations are most commonly thought of as a business organization. For families who have many sources of income, such as rental property, the corporation oversees the assets. The assets of the corporation are not listed in the estate of a grantor. Instead only the aggregate value of the shares owned by the deceased person are considered part of the estate. The corporation can maintain the assets indefinitely.

Estate Tax and Gifting

The assets in a living trust are considered part of the estate and are not exempt from federal and state estate transfer taxes. The assets in a corporation are not part of an estate and are not considered part of the estate. Instead the value of the stock the deceased individual owned in the corporation is included in the estate value.

In 2010, the estate tax has been repealed, creating a small window to transfer assets. In 2011 the estate tax will be reinstated and will be range between 18 to 46 percent.

Grantors are allowed to give $13,000 per beneficiary annually. This can be done in either the living trust or the corporation structure. Living trusts can pass cash or assets valued at no more than $13,000. Stock holders can give corporation stock with a value of no more than $13,000. Give gifts reduces the value of the estate during the lifetime of the grantor.

Considerations

Review the rules and regulations concerning how the Internal Revenue Service (IRS) views these entities. Both a living trust and a corporations have independent Employer Identification Numbers and file taxes independent of the grantor(s). But if a family corporation was created exclusively for the purpose of transferring assets, the IRS will view the corporation as non-existent and will add all assets to the estate value. For living trusts that skip a generation, the IRS may double tax those funds, requiring that assets must be taxed at least once per generation.

Expert Advice

Speak with an estate planning professional and tax adviser about the most suitable structure for your assets before establishing either plan. The larger the value of your estate and the more diverse the assets are within it, the more planning you will need to not only transfer the assets but to preserve the value of the estate. Estate planning experts may use a living trust, a family corporation, life insurance and other trust structures to implement your desires.