I read the news today, oh boy. About the lucky taxpayers who have a new estate tax exemption. And though the news was rather sad (for the IRS). Well I just had to laugh ... because, yes, trusts are still a very good idea estate planning tool.*
A very good idea, indeed.
If you are in any profession or line of work long enough, you see a lot of changes. In fact, change, it has been said, is the only constant in life.
So it is with the federal estate tax and the legal tools we deploy when planning client estates.
When I prepared my first client estate plan in January 1985, the federal estate tax exemption was $400,000.
Today, it is $5 million, as indexed for inflation. Consequently, for 2014 the amount is $5.34 million and for 2015 the amount rises to $5.43 million.
On the one hand, this serious increase in the exemption over the years has obviated "estate tax planning" for all but about one percent of the population. (Emphasis added.)
On the other hand, the need for proper "estate planning" has increased with the prospects of larger inheritances now that the IRS has been disinherited. (Emphasis added.)
Some Americans planning their estates for the first time or are revisiting their current estate plans are confused regarding whether trusts remain an important estate planning tool. This is a legitimate issue.
Recently, Cincinnati.com addressed their confusion in an article titled “Trusts remain useful tool in estate planning.”
One very popular estate planning tool, the revocable trust, remains very much the foundation for many estate plans and is used frequently. In this arrangement, the maker of the trust (the person planning his or her estate) retains total control over the assets, but bypasses probate should the trust maker become incapacitated or die.
Trusts can be funded with a wide variety of assets, too. For example, securities, life-insurance proceeds, and real estate, as well as tangible personal property, are commonly used to fund trusts.
A common use of a trust is to administer the eventual inheritance for loved ones of the trust maker is ways recognize their varying and unique needs. For instance, the trust could first provide just for the surviving spouse until he or she passes away, then for the children and perhaps the grandchildren. Alternatively, the trust could provide for the spouse and children at the same time, with distributions sprinkled among them as needed.
As for the children, a trust can be structured based on the children’s needs now and in the future. These needs may include providing funds be paid out at specific ages or on specific occasions, like when college tuition is due, the birth of a child or the downpayment for a first home.
Sometimes it is prudent to give sole discretion to the trustee as to when to make payments to the beneficiaries. Guidelines for discretionary payments can be detailed in the trust document.
Another reason trusts are used is asset protection. The trustee is the legal owner of the trust property and the beneficiaries are only beneficial owners. When the beneficiaries (other than the trust maker of a revocable trust) have no right to demand the property, then the creditors of the beneficiaries can’t get to the assets.
Asset protection is essential at times, too. Think substance abuse or a family member with special needs who is on public assistance.
Questions about trusts?
Caveat emptor! Do not rely on a book of forms and boilerplate documents, and do not try to find a reliable answer on the Internet.
Your circumstances are one of a kind and your family is like no other.
[Warning: Apparently self-serving, but truly genuine advice based on nearly 30 years of experience, follows.]
Accordingly, find a local, experienced estate planning lawyer for specific legal advice. It is worth the time, cost, and peace of mind.
*Actually, this is not "news today," but part of the "American Taxpayer Relief Act of 2012." I just could not resist opening this blog post by borrowing loosely from the opening of "Day in the Life" from the final cut on the Beatles "Sgt. Pepper's Lonely Hearts Club Band" album.
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.
Reference: Cincinnati.com (November 21, 2014) “Trusts remain useful tool in estate planning”
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