Tuesday, March 24, 2015

Do I Need a Trust?

piggy bankDo I Need a Trust?

There are multiple uses for a trust agreement.  They can be used for tax planning, privacy reasons, and to provide asset protection from the creditors of beneficiaries.

Traditionally, trusts have been used mostly for tax planning; prior to the 2000s and the most recent tax changes, many more Americans needed a trust to protect against potential estate tax liability than are needed now.  The estate tax exemption was originally $675,000 in the early 2000’s, then increased to $1 million, then to $3.5 million, and now it is at $5 million (indexed annually for inflation – currently for 2015 $5.43 million).  Now that the estate tax exemption exceeds $5 million, there aren’t many Americans that really need a trust for tax planning.

Several other changes made creating a trust less important for tax planning.  The estate, gift, and generation skipping transfer taxes were unified and therefore the total lifetime exemption for these taxes is $5.43 million for 2015.  Additionally, there is portability for the estate tax exemption between spouses in which the unused exemption of the deceased spouse can be used by the spouse that is second to die.  Ensure that you seek the assistance of a tax professional because a tax return must be filed for the spouse that is first to die in order to preserve the unused exemption.  Another important note is that a dynasty trust no longer protects a family from the generation skipping tax.

Now that the majority of Americans do not need a trust for the benefit of tax planning, is there really any reason to have a trust at all?  Yes.  There are several concerns that clients have which make the creation of a trust agreement the right path for them.  Examples of those situations include:

  • Special Needs Trust: This involves creating a trust for a beneficiary who is disabled.  This type of trust allows the beneficiary to receive distributions without forfeiting the benefits received through the social security administration or Medicaid/Medicare benefits.

  • Asset Protection: If your beneficiaries have creditors, then putting the assets in trust will protect those assets from the reach of the creditors until the distributions are made to the beneficiary.  It protects the trust assets as a whole but the distributions are no longer protected once they are in the hands of the beneficiary.

  • Privacy issues: Wills are part of the public record.  Trust agreements are not a part of the public record, therefore, in order to maintain privacy as to the assets of the estate, some clients prefer to create a trust so that only the beneficiaries of the trust know the contents of the estate.

It is always best to contact an experienced estate planning attorney to discuss whether a trust would be appropriate for your specific situation.

Attorney Angel Oliver/McGrath & Spielberger, PLLC assists clients with all sorts of tax, business, and estate planning matters in North Carolina. Click here to contact Ms. Oliver about your tax and/or estate planning matter.