CPAs often emphasize the tax benefits of trusts. Trusts can help minimize estate taxes and, in some cases, income taxes. For example, irrevocable trusts can remove assets from your taxable estate, potentially reducing estate tax liability. Additionally, certain trusts can be structured to take advantage of annual gift tax exclusions, further reducing the taxable estate.
However, there are a number of other reasons you might want to consider setting up a trust, even if you think your estate isn’t that large.
Avoiding Probate
One of the primary advantages of a trust is that it allows your estate to bypass the probate process. Probate is the legal procedure through which a deceased person’s estate is administered and distributed. It involves validating the will, paying debts and taxes, and distributing the remaining assets to beneficiaries. This process can be time-consuming, costly, and public. By placing your assets in a trust, you can ensure that your beneficiaries receive their inheritance more quickly and privately, without the need for probate.
Flexibility and Control
Trusts offer a high degree of flexibility and control over your assets. You can set specific terms and conditions for how and when your assets are distributed, ensuring that your wishes are carried out precisely.
Incapacity Planning
A trust can provide for the management of your assets if you become incapacitated. You can designate a trustee to step in and manage your affairs without the need for a court-appointed guardian, ensuring that your wishes are followed.
Protecting Beneficiaries
Trusts can protect beneficiaries who may not be capable of managing their inheritance due to age, disability, or poor financial habits. A trustee can manage the assets on their behalf, providing for their needs while safeguarding the principal. This is often referred to as a spendthrift provision.
Specific Distribution Plans
Trusts allow you to specify exactly how and when your assets are distributed. This can be particularly useful for ensuring that minor children or beneficiaries with special needs are provided for appropriately, according to your wishes.
Still, we shouldn’t minimize the tax planning benefits that trusts provide. Trusts can be an effective tool for minimizing estate taxes. By strategically placing assets in certain types of trusts, you can reduce the taxable value of your estate, potentially saving your heirs a substantial amount in taxes.
Common Misconceptions About Trusts
Despite their benefits, there are several common misconceptions about trusts that can deter people from considering them as part of their estate plan:
Trusts Are Only for the Wealthy, and I’m not:
Trusts Are Only for the Wealthy, and I’m not:
Many people believe that trusts are only necessary for those with significant wealth. As discussed above, trusts can benefit estates of all sizes by providing control, protection, and privacy. Additionally, the threshold of wealth where estate taxes kick-in is not static. Federal and state laws have changed over the decades and could be changed again. In 2024 the federal estate tax exemption was $13,610,000. As recently as 2003 it was $1 million and in 1983, the federal estate tax exemption was just $275,000. The maximum estate tax rate has also changed over time. It has been holding at 40% for the last decade but was as high as 77% as recently as 1976. Also, don’t forget about states. Twelve states currently have an estate tax. In Illinois, where I live, the exemption is just $4 million. Many people also don’t realize that life insurance policies are included in your estate. So, how wealthy will you be when you pass? You just might be wealthier than you think according to the law!
Trusts Are Too Complicated:
While setting up a trust does require careful planning and legal assistance, the long-term benefits often outweigh the initial complexity. A CPA or estate planning attorney can help simplify the process.
Trusts Eliminate the Need for a Will:
Even if you have a trust, you still need a will to cover any assets that might not be included in the trust and to appoint guardians for minor children. A comprehensive estate plan typically includes both a will and one or more trusts.
Trusts Are Only for Avoiding Taxes:
While trusts can be used for tax planning, they offer many other benefits, such as protecting beneficiaries, managing assets during incapacity, and ensuring privacy.
By setting up a trust, you can have peace of mind knowing that your estate will be managed and distributed according to your wishes, providing for your loved ones in the best possible way. If you’re considering estate planning, I recommend discussing your options with a CPA or estate planning attorney to determine if a trust is right for you.
