By Julie Malekhedayat, CPA, Principal
ASL Family Wealth & Individual Tax Group
Trusts are a fundamental part of most estate plans – do you have one? Do you need one? If you do have one, does its provisions create even more trusts at your death? And if so, are they still a good idea?
Most everyone with assets will benefit by holding those assets in a revocable trust, commonly known as a living trust. Living trusts allow your heirs to transfer your assets after your death according to your wishes as outlined in the trust document, without the need for probate court oversight and approval. As the name implies, a revocable trust can be changed or completely revoked at any time before your death. It will also maintain your privacy at your death, whereas probate court proceedings are public information.
Most living trust documents for married couples create additional trusts at the death of the first spouse, which are irrevocable. In the past, one reason for these trusts, often called credit shelter trusts, was to preserve the use of the estate tax exemption of the first spouse, which in 2015 is $5.43 million. However, recent estate law changes provide another method of preserving the exemption at the first death, commonly called ‘portability’ of the exemption, without the need for extra trusts.
Also, high income tax rates and historically low estate tax rates have created a situation where there may not be much benefit from saving estate taxes with an extra trust. Finally, if you anticipate your estate will be less than a combined $5.43 million for a married couple, your heirs may save a significant amount of income taxes, and unnecessary complexity, by avoiding the use of a credit shelter trust.
In addition to living trusts, other trusts can be created and funded at any time during your life or at death for reasons not related to taxes. These trusts are typically irrevocable once created, not revocable like living trusts.
Benefits of Trusts
Some of the benefits and uses of irrevocable trusts, created during life or at death, are:
- Transferring assets out of a large taxable estate for the benefit of children and/or future generations as a means of reducing future estate taxes
- Ensuring assets pass to your children at your spouse’s death (particularly in a second marriage)
- Protection of assets from outside creditors
- Providing trustee control and oversight of assets for minor children
- Providing trustee control and oversight of assets for irresponsible beneficiaries
- Preserving family legacy assets
- Protecting government benefit qualification for a beneficiary with special needs
Trusts have many uses and can be invaluable in meeting tax and non-tax goals. To keep your plan current, it’s a good idea to revisit your trust needs every few years, especially after major life events and ever-changing tax law updates. While some trusts may go out of style, others may become just what you need.
As always, we’re happy to help with any questions. Please feel free to contact us or consult with your estate planning attorney regarding these complex estate tax issues.