Rethinking Old Trusts and Your Estate Planning

If you have a trust, you may think that their original purpose no longer seems compelling. Your estate plan may designate that your assets will pass into a “bypass” or “credit shelter” trust, which will pay income to your surviving spouse and ultimately pass assets to your children. Historically, it was common for married couples to set up such trusts to avoid wasting a deceased spouse’s unused estate-tax exemption. But “portability,” introduced in 2011, allows a surviving spouse’s estate to use any estate-tax exemption amount that the first-to-die spouse did not use.

What’s more, beneficiaries inheriting assets from such bypass or credit shelter trusts miss out on a big tax break. When assets such as stocks and real estate are passed directly through an estate, these assets “step up” in basis to the market value on the day the owner died, so heirs pay tax only on appreciation after that date. Assets passed through bypass trusts don’t get the basis step-up.

While the estate tax exemption has been increased and your estate may not be subject to federal estate tax, before you decide these trusts have not value, consider that they can serve many purposes beyond avoiding federal estate tax. Here are a couple of things to consider: Do you need the creditor protection that a trust can provide? What if you wind up in a nursing home and spend down all your assets, leaving nothing for heirs?

The new law also opens the door to trust strategies that provide immediate income-tax savings and asset protection while allowing you to maintain access to your money. If you are interested in getting around the new tax law’s $10,000 annual limit on state and local income and property tax deductions, there are planning options available that can help to save income taxes. Real estate transfers to a limited liability company could provide tax savings with regard to real estate tax deductions.

It is wise to review your estate planning documents periodically and especially when there have been significant changes in the tax laws or changes in personal situations. Each person’s situation is unique and may have options different than those of their neighbor.

When reviewing and updating your documents, wills and trusts are not the only documents to be reviewed. Don’t forget durable powers of attorney and health care directives. Situations may have changed that would be cause for updating these documents as well.


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About the Author

Kay Sowa is a paralegal in the Trusts and Estates Group at Capehart & Scatchard, P.A. She is an IRS Enrolled Agent, an Accredited Estate Planner®, and a Certified Trust and Fiduciary Advisor. She oversees the trust and estate administration practice for the firm. She is an accomplished author and lecturer who has frequently spoken on behalf of a number of organizations including the National Business Institute and the Institute of Paralegal Education.

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