Financial Planning for August 2013

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Non-Tax Reasons to Use a Trust

The American Taxpayer Relief Act of 2012 made permanent the lifetime exclusion for estate, gift and generation skipping taxes. Obviously, a key reason people engage an irrevocable trust in estate planning is to help minimize estate and gift tax liabilities. If your estate is valued at more than $5.25 million (in 2013), excess proceeds are subject to a federal tax rate as high as 40 percent.

With the higher exclusion amounts now made permanent, you might not think you need a trust to transfer assets effectively. However, there are plenty of other non-tax reasons why a trust might benefit an estate plan. For example, due to today’s more complicated family structure, a trust can help you control who gets what assets now and/or when you pass away.

When it comes to marriage, particularly a second or third marriage in which more children are likely to be involved, a trust can serve as a less-contentious alternative to a prenuptial agreement. You can place assets owned prior to the marriage into a trust naming yourself as both the trustee and beneficiary. This will protect those assets from a settlement should the marriage later end.

A Marital/Bypass Trust (A/B Trust) is an irrevocable trust that maps out your inheritance plan. It cannot be changed by your surviving spouse and ensures that no one – including your children, stepchildren, any subsequent spouses or external parties – can unduly influence your named trustee. The A/B Trust can transfer specific assets to your children even if your surviving spouse remarries and decides to leave assets to the subsequent spouse.

Another way a trust can be effective is in the management of assets you leave to a younger child or even an adult child whom you worry will spend the inheritance precipitously. In this scenario, you would create a trust to be managed and administered by a trustee of your choosing. In some jurisdictions, you can develop a “directed trust,” which allows you to name a trustee to administer the trust while someone else manages the assets.

Developing an irrevocable trust is a good way to protect your wealth against lawsuits, creditors and divorce settlements. Many doctors, as well as others who work in high-liability professions, place assets in a trust to shield them from the potential of a malpractice settlement. This same protection can shield assets from liability claims following an accident involving your car or on your property.

A Supplemental Needs Trust, also referred to as a Special Needs Trust, is designed for handicapped individuals. It is an irrevocable trust designed to earmark assets for the needs of a loved one with a mental or physical disability. Creating this type of trust allows that person to remain eligible for government benefit programs. Otherwise, a handicapped individual who owns more than $2,000 in assets would be disqualified from receiving Medicaid and Social Security benefits.

Considering today’s longer life spans, some seniors are creating a trust in case they become incapacitated due to old age or Alzheimer’s disease. Often a disability affects an elderly person’s ability to make prudent financial decisions. By transferring assets to a revocable trust and naming yourself both beneficiary and trustee, you can manage your financial affairs until the point when you reach diminished capacity – as defined by the trust language. At that point, your pre-appointed successor trustee would take over management of those trust assets.

While a will distributes your assets according to your wishes after you pass away, it is still subject to the expenses, delays and lack of privacy associated with probate. You can avoid probate by transferring your estate to a living trust. This is a particularly good idea for assets located in several different states, so your heirs can avoid being subject to probate in multiple states.

Planning ahead saves time – and money – in the end.


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