An exempt trust is a method of estate planning that is used to reduce tax liability for gifts given, especially upon death. When a person dies, his estate, or the physical property, cash, and other belongings that he leaves behind, are typically considered to be subject to taxation by the government when transferred from the original owner to his heirs. One way to lessen the burden of inheritance and death taxes is to set up a trust, in which the assets are held jointly or individually by the original owner and his or her heirs, but separately from the owner's personal assets. There are two types of trusts: non-exempt trusts, which require taxes to be paid upon the assets held by the trust upon transfer; and exempt trusts, which do not require taxes to be paid upon transfer of the assets.
An exempt trust is often known by other names, such as an exemption trust. An exempt trust will place the assets of a married couple into a trust, or in the name of separate organization that has been created. The trust will then hold the assets until one of the spouses dies; when the second spouse then goes to claim the assets, he or she will already have access to them through the trust, and will not be considered for tax purposes as having inherited the assets or as having had them transferred through the inheritance process. This method helps reduce or eliminate the tax liability of the surviving spouse.
An exempt trust works because neither spouse has access to the money until one has passed away, and neither can remove funds from the principal balance, only from the interest or other earnings made by the trust. By being taxed on the lesser amount earned by the trust, the individuals are effectively skirting a large one-time tax on the balance of the money when one of the spouses dies. After one has passed away, the second spouse will have access to the principal balance, which will allow him or her to continue to live comfortably, without having to pay a large chunk of the inherited money to the government or other taxation office.
Exempt trusts are fairly complex legal and tax structures. Such trusts are best set up with the help of a competent lawyer and accountant. The specific rules and requirements for what must be done to set up an exempt trust may also vary by region, and a tax professional can explain these jurisdiction-specific rules.