Why Trump’s Tax Plan Won’t Reduce Affluent Investors’ Need for Trusts
Trump’s Changes and How They Relate To Trusts
The tax reform signed into law by the Trump administration recently calls for sweeping changes in the tax code. Some tax brackets were raised while others were lowered. Corporate tax rates were slashed, and standard deductions were raised. No matter your political leaning, we can all agree that it’s one of the biggest legislative changes in years. One portion of the plan, almost an afterthought, stood out to us. About a third of the way through the bill, the following appears:
“INCREASE IN BASIC EXCLUSION AMOUNT.—In the case of estates of decedents dying or gifts made after December 31, 2017, and before January 1, 2026, subparagraph (A) shall be applied by substituting ‘$10,000,000’ for ‘$5,000,000’”
In layman’s terms, this means that the tax reform doubled the threshold before the government begins imposing the estate tax — a troublesome tax that has been a thorn in the side of affluent individuals since the modern version was enacted in 1916. It has evolved over the years, and the wealthy have gotten very creative in their methods of circumventing the tax that can wipe out 40% of their taxable estate.
One of the most prolific methods of reducing estate tax liability available to wealthy individuals is the utilization of trusts. Some trusts are a repository for assets you donate during your lifetime, removing the asset and any future appreciation from your taxable estate. Others become effective at the passing of the benefactor who creates the trust. Trusts come in many shapes and sizes and accomplish many objectives. Due to the new tax law, beginning on January 1, 2018, up to $11.2 million of assets for individuals and 22.4 million of assets for couples will be safely excluded from estate taxes. One might wonder if trusts will become less popular with this change to the estate tax. To answer that question, it’s important to be aware of the unique characteristics and effects of trusts.
When you die, your assets will pass to your heirs one of three ways:
- Trust — assets placed into trust are distributed to heirs according to the trust documents. A trustee appointed by the benefactor will ensure that the trust documents will be followed. When done correctly, this avoids the probate process entirely.
- Contract — this is the way that Transfer-on-Death, Payable-on-Death, and IRA accounts with beneficiary designations are distributed. They do not go through the probate process, but are part of your taxable estate.
- Probate — an often lengthy and expensive process where the court system determines the legitimacy of your will and distributes your assets. This can take months or years, offers zero privacy to the participants, and depending on the state can be quite expensive. This is how all assets that are not distributed through trust or contract make their way to heirs.
Once a trust is established for your heirs, you have ensured that your assets quickly and efficiently pass to who you want, when you want after your passing. This benefit of controlling your money even after your death is a key component of trust law.
Liability Protection and Privacy
Both an individual’s will and the probate process for their estate are part of the public record. This means that any person can see what assets went through probate and to whom they were given. This can be uncomfortable for the family, but it also presents some serious risks. Suppose that an individual, let’s call him Bob, gets in a wreck. It is determined to be his fault, and his insurance covers the damages. If Bob recently inherited $1,000,000 from his great uncle via a probated will, a personal injury attorney can google Bob and see that he has $1,000,000 in liquid assets readily available for an injury lawsuit. He quickly becomes a target for litigation. If he received the inheritance through trust, however, it is extremely difficult to determine that the extent of Bob’s assets and makes him far less enticing of a target. This principle holds true for any individual who is exposed to liability by virtue of his work or lifestyle. Doctors, Sole Proprietors, and other business owners are the types of individuals who are particularly at risk. This privacy is another key advantage of trusts.
Family Asset Protection
To put it simply, trusts have the capability to keep family assets within the bloodlines. This can protect a couple’s heirs in the event that one spouse passes away and the surviving spouse remarries. Suppose an individual passes away with 15 million dollars — the deceased would not want the spouse to remarry, divorce again, and be forced to surrender half of the assets to the new spouse through unintended property law complications. By putting assets in trust for the benefit of specific individuals, family wealth is preserved and protected against predators and opportunists.
The above examples only begin to scratch the surface of the immense benefit that trust law can provide to a wide variety of wealthy individuals. Even if though the estate tax has changed, estate planning and asset-structuring strategies encompass far more than the taxation aspect. Our firm is well versed in the intricacies of the trust tools at your disposal and is happy to have an honest discussion about how we can help you protect yourself and your family from any eventuality. Feel free to contact us with any questions on any financial matter — we’re here to help.
Need Some Help?
If you’d like some help from a CPA or CERTIFIED FINANCIAL PLANNER (CFP®) advisor regarding this strategy and how it applies to you, the Rhame & Gorrell Wealth Management team is here to help.
Our experienced Wealth Managers can help you review your financial and tax situation inside the 401(k) and come up with a custom tax optimization strategy going forward – all at no cost to you!
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