The Changing Role of Trusts in Estate Planning

7.27.16A legislative change made the use of trusts less necessary for most Americans, but there are still many situations where this planning tool is the best option.

When the American Taxpayer Relief Act became law, the $5 million exemption and the new rules on portability of the exemption for married couples (i.e., $10 million per couple) became permanent. The tax rate on estates over that threshold, now $5.45 million per person, was bumped up to 40%. Many people who had created trusts to protect their descendents from estate taxes had cause to grumble because their trusts were no longer necessary, according to CNBC in “What's the difference between an inheritance and a trust?”

The estate tax now only affects about 0.2% of the population, translating to about 600,000 Americans. This was one of the big reasons why people set up trusts over the last 20 years…to avoid estate tax consequences. But trusts continue to have an important role in estate planning.

Now folks are looking at income and capital gains taxes. Trusts aren’t the best for those, as heirs who receive assets through trusts versus an inheritance at death don't get a step-up in cost basis on assets like stocks and real estate. If a couple has less than $11 million, there’s no good rationale for creating a trust just for tax purposes.

Trusts are still a very useful way to provide for the administration of property and wealth for families and for philanthropy. They’re also a key component of an estate plan, along with a power of attorney and a will.

In addition, a trust is a powerful vehicle for people to manage assets for themselves, their families and other beneficiaries both during their lifetime and after they pass on. You have the ability to transfer assets to children in a controlled manner and can allow people more control over how assets are made available to others.

Regardless of the size of your estate, the best plan begins with a clear understanding of what it is you wish to achieve: leaving a legacy, protecting assets or making philanthropic gifts. Work with an experienced estate planning attorney in Houston to learn how these goals can become reality, using trusts and other estate planning methods. The sooner you start, the more likely you are to realize your goals.

For additional information related to trusts and estate planning in Houston, please visit our website.

Reference: CNBC (July 6, 2016) “What's the difference between an inheritance and a trust?”

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