What a Trust Can Do for You

The higher exclusion amounts for gift and estate taxes have prompted many investors to take another look at the role of trusts in helping them achieve their financial goals.

Circumstances differ from family to family, but one clear fact is emerging: trusts remain an important tool in many situations, and for a range of reasons.

UNDERSTANDING THE BENEFITS OF TRUSTS

Trusts can be used for many other purposes, including:

  • Control of your wealth. Should you become incapacitated while you’re living, a funded and properly constructed revocable trust, for example, may ensure that the trust assets will remain available for your benefit. After you’re gone, the same trust can control who will receive distributions from the trust, as well as when the distributions will occur and on what terms.
  • Protection of your legacy. A properly constructed trust can protect your legacy from your heirs’ creditors, or from the spendthrift ways of the beneficiaries themselves.
  • Privacy and probate savings. The assets included in your will must pass through your state’s probate process. This requirement raises two concerns: first, there are fees associated with probate; and, second, probate records are generally accessible to the public. By putting assets into a revocable trust during your lifetime, however, you can avoid having these assets pass through probate at your death and retain your family’s privacy, while retaining full use and control of those assets during your lifetime.
  • Gift tax considerations. The gift tax exemption has remained high—$5,490,000 for 2017. But while this may be a sound strategy for removing the money from the donor’s estate, remember that the donor relinquishes all control over the money. By gifting the money instead to a trust, the benefactor can at least establish control over how and when it is to be distributed to beneficiaries.
  • State inheritance/estate taxes. Estate taxes aren’t the sole province of the federal government. Although California doesn’t current have an estate tax, there are 22 states that also levy an estate tax; some can be far from inconsequential and often apply to estates worth much less than the current federal estate tax exemption of $5,490,000. In addition, California may reinstate an estate tax if certain changes in the federal estate tax laws occur. As a result, for those who live (or have assets such as real estate) in a state that has an estate tax, a properly constructed trust can be an effective estate planning tool.

TYPES OF TRUSTS

The type of trust you consider creating—and the provisions you include—depends on your individual circumstances and goals. While the variety of trusts and their uses are too many to list and discuss fully at this time, here are a few examples:

  • As already discussed above, funding a revocable trust, also known as a living trust, during your lifetime can be useful in keeping your assets out of probate and helping to provide privacy and efficiency for the settlement of your estate.
  • If making gifts during your lifetime makes sense for estate tax savings or other reasons, the use of a specifically designed irrevocable trust to receive such gifts, given your personal circumstances and needs, may be warranted.
  • For example, a qualified personal residence trust (QPRT) may allow you to transfer a primary residence or vacation home out of your estate, while allowing you to use that residence during a specified period of time.
  • The uncertainty over future estate tax law clearly presents an ongoing challenge for keeping your estate plan aligned with the law at the time it is exercised. Couples who have estates that may or may not be valued under the federal estate tax exemption at the death of the first-to-die spouse or partner may want to consider a disclaimer trust. This type of trust allows the first-to-die spouse or partner to leave everything to the surviving spouse or partner but allows the survivor to disclaim the inheritance in a timely fashion and have it go into a trust instead. Such a strategy would allow the surviving spouse or partner to base his or her decisions on the existing laws at the time of the spouse or partner’s death.

Clearly, deciding which trust to use, if any, is a complex challenge that requires the advice and guidance of a trusted estate planning attorney. Now may be the time to consider a trust that meets your needs.

 

Fidelity does not provide legal or tax advice. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Fidelity cannot guarantee that the information herein is accurate, complete, or timely. Fidelity makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation.

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