Trusts are great for specific estate planning strategies ... but may not be the best option for everyone.
You may need a trust.
Then again, you may not.
Trusts can help with estate tax bills and putting guidelines on the distribution of your estate; however, if used without proper planning, they can be problematic.
Let us review what a recent NJ 101.5 post, titled “The disadvantages to trusts,” says about common issues trusts can cause.
Although estate taxes are minimized with the use of a trust, incomes taxes can rise.
Although you, as the grantor, may not be subject to these taxes, your heirs will be.
Any undistributed income generated by the assets in the trusts (e.g., once you pass on and they become irrevocable) will be taxed as income accordingly.
Unfortunately, the income tax bracket for a trust is a low $12,400 for the top bracket (compared to $415,050 for an individual).
In addition to this, there is a 3.8% net investment income tax at low thresholds.
So should you avoid trust planning completely?
You will merely need to weigh the pros and cons carefully.
Also, there are some situations where a grantor will be treated as the owner of the trust (e.g., "grantor trusts"). In this case, the trust may be taxed according to the threshold of an individual rather than a trust.
Trusts limit your control.
Whenever you create an irrevocable trust, you give over your absolute autonomy in managing the assets therein. Instead, a trustee serves as a sort of gatekeeper.
Even if the trustee is the grantor or a beneficiary, the authority may be more limited than afforded through asset ownership outside of a trust.
Trusts are sophisticated estate planning tools and are not DIY projects.
Discuss your goals with an experienced estate planning attorney to ensure your trust accomplishes what it should.
Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.
For more information about estate planning in Overland Park, KS (and throughout the rest of Kansas and Missouri), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.
Reference: NJ 101.5 (August 3, 2016) “The disadvantages to trusts”