Estate tax rules are constantly discussed by politicians. In this election cycle, one of the candidates has suggested doing away with what he calls the “death tax.” Thus, it may not come as a surprise that tax rates and exemption levels on estate have changed 20 times since 1976.
The American Taxpayer Relief Act signed in 2013 was the latest change. It extended favorable rules that allow a couple to gift $10.9 million without tax consequence. The tax rate on estates over the threshold increased to 40 percent. Following the changes, trusts generally are not been needed solely for tax planning.
Why would you still want to include a trust as part of your estate plan?
Initial questions to answer
They continue to be a useful tool to manage and transfer assets. Answering yes to these questions could indicate you need to look at adding a trust:
- Are you concerned about protecting a gift from creditors or litigation?
- Do you want to provide for children, grandchildren or charitable organizations?
The types of assets you own is another important consideration. Here are three typical reasons you might need a trust.
1. A loved one cannot be trusted with a large gift or has special needs
This one ties back to the question about creditors. If you have concerns that a child does not have the financial skills to manage a gift then a trust can space out payments and protect the principle.
A special needs trust is necessary when a loved one receives government benefits. You must take care, because a gift in a will could easily cut off access to needed care.
2. You want to transfer complex assets in a thoughtful manner
Trusts can be effective for keeping a vacation home or a closely-held business in the family. Placing a cabin in a trust may allow your children to pass traditions down to the next generation. It is also a way to limit the affects of appreciation over the years. An example of this is a recent disclosure by the Clinton’s that shows they have their New York home in a trust as reported by Money.
For large charitable donations, a trust allows you to leave a vision for how you would like the gift used.
3. Limiting the potential for relationship-damaging fights is important
When you have worked hard and been successful, a trust may be able to limit conflict and the legal fees associated with litigation. Take care in designated a trustee, however.
Appointing one sibling as the trustee could pose problems down the road. For example, children may have differing ideas about what is a necessary expense that would require a disbursement.
Discuss your goals with an estate planning attorney. An attorney at Chayet & Danzo can analyze whether a trust will accomplish these goals and assist with proper set up.