The Differences between Estates and Trusts

Estates

"The term "estate" consists of all the property a person owns or controls, whether in his or her sole name, held in a partnership, in a joint ownership arrangement, or through a trust, and all other monies that would be generated on the person's death, such as through life insurance" (Advice Company, 2006a). If an estate plan is in effect, upon the death of an individual the estate plan documents, such as a will, manage the distribution of property.

The estate "is administered by a person named in the will of the deceased person
Income, deductions, gains and losses of estates, and distributions to beneficiaries are reported on Form 1041 - U.S. Income Tax Return for Estates and Trusts (SOI Tax Stats). There is no double taxation in relation to estates, because the estate "receives a deduction for the income it distributes to its beneficiaries" (Pope et al., 2006, p. 14-4). Estates with a total value under $2,000,000 do not require the filing of an estate tax return (Estate Tax Questions). In addition, there are deductions available to help reduce the amount of estate tax liability:

1. Marital Deduction: One of the primary deductions for married decedents is the Marital Deduction. All property that is included in the gross estate and passes to the surviving spouse is eligible for the marital deduction. The property must pass "outright." In some cases, certain life estates also qualify for the marital deduction.
2. Charitable Deduction: If the decedent leaves property to a qualifying charity, it is deductible from the gross estate.
3. Mortgages and Debt.
4. Administration expenses of the estate.
5. Losses during estate administration.

(Estate Tax Questions).

Trusts

"A Trust is a well recognized type of legal entity which is used to hold legal title to property for the benefit of one or more persons" (Advice Company, 2006b). A trust may be created at any time and can be created by either a living person or a will.

There are several terms used in conjunction with trusts, some of which will be defined below:

Trust Estate - the property that is transferred to the Trust

Grantor - the person who creates the Trust