With the federal estate tax deduction set at $5.45 million for 2016 and the Joint Committee on Taxation estimating only two out of every 1,000 people will die subject to federal estate tax, what should the other 998 do?
Trusts will always remain relevant for beneficiaries that are not suited to handle outright distributions, but with the focus shifted away from federal estate tax avoidance, what should we concentrate on now?
Many clients feel allowing outright distributions to mature and fiscally responsible descendants makes the most sense, but if you are willing to consider lifetime trusts, your children could enjoy creditor protection for their inheritance. With divorce rates over 50 percent, the most financially responsible child that has never carried a credit card balance could find themselves with a creditor.
If drafted correctly, the child can serve as sole trustee of his or her own trust. If you’re concerned about losing flexibility by “locking” up funds in trust, consider the use of a testamentary limited power of appointment that allows your child to designate remainder beneficiaries.
When Congress introduced “portability,” allowing the unused exemption from a deceased spouse to pass to the survivor, it left many wondering if it was necessary to do any trust planning at the first death. While portability addresses the federal estate tax exemption, it does not address the generation-skipping tax exemption.
Without the use of a Credit Shelter Trust or a GST Exempt QTIP Trust a married couple with $9 million (NO federal estate tax due) could have inadvertently generated GST Tax due in the amount of $1,428,120.
A very costly mistake for something that could have easily been addressed, but might be missed in the name of simplicity and convenience by relying solely on portability.
With marginal tax brackets highly compressed for trusts and estates, a trust with taxable income in excess of $12,150 has already reached the maximum marginal rate of 39.6 percent and the 20 percent rate on long-term capital gains.
Single taxpayers do not reach those maximum brackets until Adjusted Gross Income is over $406,750. When income is distributed to the beneficiary, income is taxed at his or her individual rate rather than being “trapped” in the trust at much higher rates. Simply defining capital gains as income for trust accounting purposes or giving the trustee the flexibility to characterize them as such in the trust document itself can greatly reduce total income tax paid by the trust and its beneficiaries.
With estate tax avoidance taking a back seat to other significant planning opportunities, the use of trusts in your estate plan is still an important consideration.
According to a recent CNBC survey, 38 percent of families with net investable assets over $1 million have not established an estate plan. How long has it been since you’ve reviewed your plan with an advisor?
Steve Kamienski is vice president and relationship manager of the Central Trust Company in Springfield, Mo.
