People 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 exemptions 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 basic 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 $5 million in 2026. If your estate is not subject to estate taxes now, it may be in a few years. In addition, many members of Congress and many candidates for Congress are running on a platform (in part) to reduce the exemption to $3 million or even $1 million.
- 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. Fortunately, Ohio has (as of now) eliminated its estate tax.
- Avoiding probate. If you fund your trust during your lifetime, you will avoid the probate process in both Ohio and other states if you have non-Ohio real estate. 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 both time and money. The normal timeframe for Ohio probate administration is six months to two years.
- 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 guardian appointed to oversee your assets.
- Potentially limiting children’s access to their inheritance. If you have minor children, a child with a disability, or a child with problems managing money, you want to make sure their inheritance is overseen by a trustee until they are mature enough to manage their money themselves.
- Protecting beneficiaries from themselves. If a beneficiary has a drug addiction, has issues with the law or just makes poor choices, having a trustee limits their access to the trust funds.
- Making a lifetime gift 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.
- Divorce happens. If a child beneficiary of yours 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 or him susceptible to lawsuits, having a trust can protect the assets and keep them out of reach of creditors. Clients with children who are physicians often keep the child’s inheritance in trust to protect from any such judgements.
- Preventing bad decisions by a surviving spouse. Do you really want your spouse spending your hard-earned money on exotic vacations with the pool boy or the local cocktail waitress? What if your surviving spouse blows the money on shopping trips leaving your children with nothing? We have seen both situations and they are not pretty. Trusts can help these scenarios.
Different trusts serve different purposes. Estate tax savings can be an important part of trust planning, but there are many other facets, usually more important than taxes, of trust planning to consider and incorporate into your estate plan.