Reduce Estate Taxes
An estate tax is a tax on your right to transfer property after your death [source: IRS]. A trust can provide a way to avoid or reduce estate taxes because assets and property placed into a trust are not subject to these taxes. For example, with a children's trust, a grantor can make tax-free monetary gifts from an estate to children or grandchildren. By making these gifts, the donor is reducing the overall taxable amount of the estate, and thus lowering tax liability. However, there are limits to how much you can give without incurring taxes; for 2009, annual gifts up to only $13,000 were nontaxable. This amount is called the annual exclusion, and it applies to as many gifts as you give. So if you have six children and give them each $13,000 over the course of a year, you would incur no taxes [source: IRS].
Estate tax benefits aren't important for everyone, though. While the law is always subject to change, only the wealthiest 2 percent of Americans end up having to pay estate taxes: those whose taxable estates are worth $1 million dollars or more, after standard deductions are taken [source: IRS].