Friday, February 21, 2014

Trust Planning

A major benefit of trust planning in the past was the ability to shelter assets from estate taxes. There have been changes in the estate tax law (with the American Taxpayer Relief Act of 2012) that has eased the estate tax burden significantly. First, the amount exempted from estate tax was raised (currently $5.25 million per person and indexed for inflation). Thus, a married couple can shelter up to a total of $10.5 million from estate tax. Second, that act also provided for a “portability election.” That election allows any unused exclusion amount from the deceased spouse’s $5.25 million to be transferred to the remaining spouse—in essence allowing married couples to utilize the full $10.5 million exemption without the trust arrangement that had been required in the past. There are, however, still circumstances in which trust planning is advisable.

Basically, a trust is a separate, legal entity established in a written document that has three components: 1)The Grantor- who puts assets (the trust corpus) into the trust, 2)The Trustee-who manages the assets placed in the trust, and 3)The Beneficiary-   who receives benefits from the trust according to the terms specified in the governing trust document.  Trusts still offer advantages in particular circumstances. Please note that items listed below are general in nature; specific questions and appropriateness for your particular situation should be discussed with competent legal counsel. Trusts can provide the benefits in situations such as the following:

Spendthrift protection- Some individuals, regardless of age, may be incapable of managing significant levels of assets. In such situations, the trustee may manage the assets and provide funds to the beneficiary to satisfy beneficiary needs. A common provision for such beneficiary income is for “…health, education, maintenance, and support…”

Blended families—Trusts can be used in blended family situations to ensure that assets are passed to specific individuals. For example, a trust can be used to provide income to a second spouse for that spouse’s lifetime; the trust corpus can be left to other individuals (children from the first marriage).

Creditor protection- Assets held in trust may be unavailable for attachment in creditor situations. Those assets could be protected depending on trust provisions and who established the trust. It is important to note that an individual cannot establish creditor protection trusts for themselves and still maintain control of the assets. Consult your attorney for specifics in your case before relying on trust arrangements for creditor protection.

Divorce protection- Unfortunately, divorce is becoming a common factor in marriages today. A well drafted and well maintained trust can remove assets to be shared by a departing (ex) spouse. Again, an individual cannot establish such a trust for themselves; establishment must be done by another party (i.e. parents leaving assets to their child in trust are not subject to divorce proceedings).

Estate planning—Even though the exclusion amount discussed above eliminated the need for some trusts, there are other tax advantages to be gained through trust planning. Income shifting or estate growth planning can be done with specialized trust. Charitable trusts, personal residence trusts, and numerous other techniques may be used for specific circumstances. These cases are best discussed with your attorney.

We, at Paragon Financial Advisors, do not draft legal documents; that is to be done by the attorney of your choosing. However, our principals have extensive experience working with trusts and can assist you in determining the questions to ask as you use trusts to further your financial goals. If you have any questions please call us.  Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas. We offer financial planning and investment management services for our clients.


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