Clients often ask, “Why do I need a trust?” This question comes up even more frequently since Congress passed the Tax Cuts and Jobs Act of 2017, which increased the federal estate tax exemption amount from approximately $5 million per person to $11 million per person or $22 million per couple. Those amounts are adjusted for inflation, so this year the exemption amount is $11.4 million per person.
If you and your spouse have less than $22 million, you may think you can get by with a simple will. Here is why you need more than that.
The tax cuts are temporary. The $11 million federal estate tax exemption amount is scheduled to drop back to the $5 million range in 2026. If your estate is not subject to estate taxes now, it may be in a few years.
Your state matters. Your state may impose its own state estate tax. This is true of Massachusetts which has a $1 million estate tax exemption. If you own real estate in another state, you may be subject to that state’s estate tax laws as well. You should be planning to minimize state estate taxes in all applicable states.
Avoiding probate. If you fund your trust during your lifetime, you will avoid probate. Avoiding probate means your family will not have to go to court to authenticate your will after your death in order to access your assets. This saves time and money.
Planning for incapacity. Another benefit to funding your trust while you are alive is that your successor trustee can access the assets for your benefit if you become incapacitated. If you are in the ICU or a long-term care facility, who will pay your bills and manage your assets? If your trust is funded, the successor trustee can do that. Otherwise, your family may have to go to court to have a conservator appointed to oversee your assets.
Limiting children’s access to their inheritance. If you have minor children, you want to make sure their inheritance is overseen by a trustee until they are old enough to manage the monies themselves.
Making lifetime gifts to children. If you want to make a lifetime gift to a child, this is best done through an irrevocable trust to define the child’s access to the funds and to allow you some tax savings.
Protecting beneficiaries from themselves. If a beneficiary has a drug addiction, is a spendthrift or just makes poor choices, having a trustee limits their access to the trust funds.
Divorce happens. If a beneficiary goes through a divorce, a trust could prevent their divorcing spouse from obtaining all or a portion of their monies in a settlement.
Creditor protection. If a beneficiary is in a business or profession that makes her susceptible to lawsuits, having a trust can protect the assets and keep them out of reach by her creditors. Clients with children who are physicians often keep the child’s inheritance in trust to protect from any such judgments.
Preventing bad decisions by a surviving spouse. Do you really want him or her spending your hard-earned money on European vacations? What if your surviving spouse blows the money on shopping trips leaving your children with nothing? I have seen both situations and they are not pretty. Trusts can prevent these scenarios.
Different trusts serve different purposes. Estate tax savings can be an important part of trust planning, but there are many other facets of trust planning to consider and incorporate into your estate plan.