Category: Estates | Inheritances
Question: Some friends, who I’m sure are far wealthier than I am, suggested creating a trust document for my assets. How do I know if this is appropriate for me?
Answer: Many high-net-worth people create trusts to help with estate and tax planning, yet there are other reasons for a trust. Trusts can be used to help retain control and management of assets in the event of disability, protect estate assets from creditors, maximize philanthropic giving, and avoid probate.
The 2017 Tax and Job Acts increased the exemption amounts for estate, gift and generation-skipping for tax purposes from $5 million to $11.8 million; in 2022 this increased to $12.06 million. With proper planning, the bill allows couples to have a combined gift and estate tax exemption amount of about $24.12 million to pass on free of federal estate taxes upon their death. Anything above that amount may be subject to a 40% tax rate. Since most of the population doesn’t fall into this high-net-worth category, let’s look at other reasons why establishing a trust might be beneficial.
A living or revocable trust can be used to retain control of your assets. As the trustee, you map out your inheritance plan and can make changes during your lifetime. At your passing, the trust cannot be changed and eliminates the possibility of undue influence from children, stepchildren, current or past spouses, and any external parties. Another reason for a trust is if there are young children or adults not yet ready to assume financial responsibility, a trust can ensure assets are not mismanaged or recklessly lost. Think of a trust as an umbrella of protection for assets to be controlled by a trustee of your choosing, rather than by your beneficiary, who may be influenced by others.
Protecting assets from creditors, divorce, litigation, and malpractice are additional scenarios to consider when creating or revisiting your estate plan. Asset protection planning discussions should be considered before they’re needed to protect your assets. Certain types of irrevocable trusts may allow assets to transfer and grow outside of your estate. It’s important to work with an estate planner familiar with tax law to determine if, and what type of trust(s) would be effective in your planning.
Longer life expectancies translate into a higher likelihood of experiencing a disability that could impair your ability to manage financial affairs. This is another reason why a trust document includes language detailing specific criteria to establish diminished capacity, at which point your pre-appointed successor trustee would take over the management of trust assets.
Currently, you can gift up to $16,000 ($32,000 for couples) per year to any number of individuals without triggering gift taxes. Gifts in amounts greater than this are applied against your lifetime gift tax exemption. If you use any lifetime gift tax exemption during your lifetime, it will reduce the federal estate tax exemption available. If you’re interested in making larger gifts, you may want to consider using a trust to keep control and use of current assets, while leaving the remaining balance for the charitable organization(s) of your choice. There are several techniques, including Donor Advised Funds, that are designed to take advantage of charitable tax-saving strategies when planning philanthropic gifts. Assets you transfer while alive are removed from your estate and allow you to ensure distribution goes according to your desires.
A living trust is not subject to probate and helps avoid the costs, delays, and public nature associated with court proceedings, keeping your affairs private. A living trust provides instructions on how to manage your affairs during your lifetime, incapacity and at death. Since a living trust can only control the assets you put into it, it’s crucial to fund it by retitling assets, allowing you to avoid probate. Under the umbrella of your trust, you may name the people or organizations to inherit your assets. You also have the right to change those choices at any time, as well as revoke the trust if you wish.
Beyond tax planning, trusts help you retain control and management of assets, protect your estate, plan for a disability, maximize your philanthropic goals and avoid probate. While growing up I saw the results of negligent and nonexistent planning in our family. This experience influenced my decision to become a Certified Financial Planner. Careless or inattentive preparation can cause pain for survivors. In contrast, guiding survivors through situations where thoughtful planning is in place is a preferred path. This is one area in life where we do have choices and some control. Work with an experienced and trusted team of advisors, especially when it comes to the use of a trust. Stay focused and plan accordingly.
See the original article here: https://www.coastalbreezenews.com/columnists/ask_the_cfp/is-a-trust-necessary/article_f000fbfa-c118-11ec-8fec-e34d49986740.html
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