Under current estate tax laws, the exclusion amount is $5.49 million, and with portability, the surviving spouse of a married couple can leave an estate of up to $10.98 million without having it subject to estate tax. With such high exclusion amounts, the need to use trusts to avoid estate tax is less and less crucial to estate planning. More and more the impetus behind creating trusts is to control how your assets are directed from beyond the grave.
Trusts are an entity into or through which a person, the grantor or donor agrees to transfer assets to a beneficiary, or multiple beneficiaries, who then receive the assets as stipulated in the governing trust document. A trustee manages the trust assets and ensures the stipulated terms of the trust are faithfully carried out. The trustees are the legal stewards of the trust property, but they are obliged to manage the property for the benefit of one or more beneficiaries.
Trusts are often used to pass wealth or property to a minor child, assist a special-needs beneficiary, ensure an inheritance for children from a previous marriage, protect a child’s inheritance from divorce, control an heir’s access to assets or avoid probate. Trusts are infinitely flexible, relatively inexpensive to create and can be powerful tools designed to help individuals handle a variety of family and tax-related issues.
Despite a trust’s flexibility when it comes to tailoring it to your specific situation, trust are difficult and sometimes impossible to untangle once you’ve died, leaving your heirs with little authority to carry out your wishes. This is why it is so important to review your estate plan and trusts every few years. Your wishes will likely change over time; people will pass on and contingent beneficiaries will come into play; charitable institutions you wanted to fund may dissolve and tax laws are always subject to change.
For example, consider a couple who established a credit shelter trust to avoid estate taxes. While this was once a viable strategy, estate tax exclusion amounts have been very generous since 2010 and have largely eliminated this need. In the case of a credit shelter trust, when one spouse died, the assets went into the trust. The surviving spouse did not get a step-up in basis. Several years later when the surviving spouse passed, the heirs owed a considerable amount in capital gains tax when they sold the assets. Had the estate plan of the surviving spouse been reviewed, the family may have been able to save a considerable amount on capital gains taxes.
Other individuals use trusts to control their heirs’ inheritance from beyond the grave. They require heirs to meet certain requirements or actions in order to receive trust assets, such as requiring the heirs earn a college degree or using the assets toward the purchase of a home. These incentive trusts need to be worded carefully so as to not unintentionally encourage heirs to take the easy path. For example, if you require your heirs to attend college, you may want to limit the number of years of education the trust will pay for so your beneficiaries don’t become career students.
Furthermore, if you intend to require your beneficiaries to meet certain requirements, you should give the trustee some rights to use his or her own discretion when making distributions and managing trust assets. If one of your heirs is physically unable to attend college, you should give the trustee discretion to distribute assets so that a beneficiary is not unintentionally disinherited. However, the discretion should be limited to carrying out your wishes, as your heirs may choose to file a lawsuit the first time the trustee refuses a request for your assets.
Estate planning is an important piece of the overall financial plan. Many well-thought out financial plans have fallen apart with poor estate planning. If you have questions regarding how your estate plan fits within your overall financial plan, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166.
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