What is an Exempt Trust?

Alexis W.

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 works because neither spouse has access to the money until one has passed away.
An exempt trust works because neither spouse has access to the money until one has passed away.

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.

In an exempt trust, the assets of a married couple will be placed in a trust.
In an exempt trust, the assets of a married couple will be placed in a trust.

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.

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Discussion Comments


I have never heard of setting up an exempt trust. How would the benefits from this type of trust compare to a life insurance policy?

I know in a life insurance policy you pay money and receive a payout in the event of death. Does the beneficiary of a life insurance policy get taxed on the money they receive? What is the typical rate?

I figure that most people with an exempt trust are fairly wealthy if they have the extra money to set aside. If they are putting money into the trust, though, why not use that same money and pay it toward a very large life insurance policy? In either case no one could get money until a spouse died.

Why would someone choose an exempt trust over life insurance and vice versa?


@jcraig - I'm not positive, but I think when someone dies and there is no one specified to receive the money, it goes to the next of kin, whoever that may be. I know that is the case with things like checking accounts and similar funds. I don't know what would happen if the person stated in their will that they specifically did not want the money to go to anyone in the family. They could donate the money to a charity, but it would have to be specified. I'm sure it has had to have happened at some point. At the least, I'm sure it would start an interesting legal battle. I'd say certain factors come into play as well if a couple gets divorced.


This may be a slightly morbid question, but I still think an important one. What would happen if a couple had an exempt trust set up, but both of them were killed in some type of automobile accident? Am I right to assume that the trust probably has some sort of provision concerning what to do in that scenario? I'm sure in addition most people would have the trust mentioned in their will.

I have always wondered, though, what would happen to the money in a fund like that if the couple either had no family to inherit the money or if they just didn't want the family members to have the money. Does the money just go back to the government? How often does this happen?


Wow, I have never heard of this before. I assumed that no matter what, all money got taxed somewhere along the line. When the money is put into the trust, though, I assume it would have to be pre-tax money where the couple would be able to consider the money a deduction on their taxes. Is that right?

Even though it's surprising there is no tax, I can see the reasoning, I guess. The money is really being set up to help the widowed spouse, and I think in most cases neither spouse would be happy that they're able to use the money since it would mean their husband or wife was dead. It's not like they are using the trust to both live comfortably in the future.

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