If the Estate Tax Is Repealed, Will Estate Planning Still Matter?
For generations, families have used estate planning and trusts to transfer wealth and preserve their legacies. Unfortunately, estate planning and trusts continue to suffer from a common misconception that the sole purpose is to reduce estate taxes. This association is so strong that President Trump’s promise to repeal the federal estate tax has clients asking: If the estate tax goes away, will we still need estate planning and trusts?
The answer is yes. While irrevocable trusts help shelter assets from estate taxes, they also offer numerous non-tax-related benefits. Revocable trusts, also offer compelling benefits.
Below are 10 reasons estate planning and trusts still matter, regardless of what happens to the federal estate tax:
1. Protection when you need it most
If you become seriously ill or incapacitated, a fully-funded revocable trust can provide for the efficient management of your finances without the cost and delay of guardianship proceeding. A revocable trust may also help avoid the complications that can arise when someone acts as your attorney-in-fact under a power of attorney: many financial institutions are reluctant to recognize power of attorney documents that are created by other firms. A revocable trust typically provides the successor trustee with discretion to pay living expenses, including in-home medical care. If you are married, the revocable trust agreement can allow for distributions to support your spouse.
2. Offering your beneficiaries immediate access to funds
Without a revocable trust, financial assets will be frozen until your will has been submitted to the court and a personal representative appointed. This may cause cash-flow problems for your spouse or beneficiaries if they need to access those accounts to pay funeral expenses, medical bills and other related costs. Unlike assets held in individual name, assets held in a revocable trust can be available immediately to pay taxes, administration expenses and debts without waiting for the court’s approval. Even if funds aren’t needed, knowing they are available can provide a good deal of comfort to family members at a difficult time.
3. Avoiding the hassle of probate
The process of having the court handle the administration of an estate is time-consuming and expensive (although its costs and inefficiencies are sometimes exaggerated). If you own real property in more than one state, it may be necessary to open probate in multiple jurisdictions. In contrast, assets held in a revocable trust are not subject to court supervision and probate is not required to transfer them to your beneficiaries. That’s not to say that no work is required—you must transfer assets to the revocable trust during your lifetime and there is a process that must be followed when administering a revocable trust after death. But administering a revocable trust is much less cumbersome than administering assets through a probate proceeding.
4. Protecting your family’s privacy
If privacy is a concern for you and your family, a revocable trust could be beneficial. While the terms of a will become public information during the probate process, the terms of a revocable trust remain private.
5. Precise control over the distribution of assets
Control has always been a primary reason for establishing any kind of trust. As the person who creates the trust, you determine how it is structured, the timing and purpose of distributions, and how the assets are managed. You can create a trust for a single beneficiary or several beneficiaries, including charities, individuals and multiple generations of family members. The trust might require the payment of all income to a particular beneficiary, limit the use of principal distributions to educational or medical purposes, or trigger distributions based on age. You decide exactly how your assets will be distributed rather than leaving the decision up to a beneficiary.
6. Recognizing the complexities of modern families
Divorces, multiple marriages and blended families present challenges for individuals who want to make sure their wealth truly stays within the family. By leaving an inheritance in trust, including trusts for your spouse, you can ensure that your wealth ultimately passes along to your children or whoever you include in your definition of family. Trusts become especially important in the event of divorce because assets held in an irrevocable trust for a beneficiary are generally shielded from creditors. Proper drafting is required to take advantage of this protection.
7. Protecting beneficiaries from the unexpected
In our increasingly litigious society, asset protection has become a pressing concern. Families with considerable wealth can be especially vulnerable because they are perceived as having the financial means and motivation to settle out of court, especially when faced with claims that are scurrilous and might be made public. Beneficiaries who work in certain high-liability professions (such as doctors and lawyers) also face the threat of malpractice lawsuits. Properly structured irrevocable trusts can protect your beneficiaries from the claims of future creditors. Proper drafting is required to take advantage of this protection.
8. Caring for beneficiaries with special needs
Approximately 15% of all children under the age of 18 in the US have special healthcare needs, according to the US Department of Health and Human Services. A well-crafted trust can include provisions for the long-term care of these beneficiaries, even if their medical needs have not yet been identified. For example, your trust could be written with enough flexibility to provide special accommodations for an adult child who becomes disabled, or a grandchild (or a future grandchild) diagnosed with a serious, long-term disability.
9. Keeping your treasured property in the family
Transferring ownership of real estate or other unique assets to a trust can ensure that the property is maintained properly over the long term. A trust can also be useful when you want to divide beneficial ownership of a vacation home or some other piece of property that you want to keep in the family.
10. Benefitting from professional management
Last but not least, a professional trustee can help ease the many burdens that otherwise fall on the shoulders of family members or other trusted individuals. While you are living, professional management may help prevent you from becoming a victim of elder abuse. A professional trustee can also be responsible for communicating with your beneficiaries, handling conversations that might be difficult for you personally or for your family. Professionally managed trusts can offer the convenience of professional record-keeping and administrative services as well as the skills of professional investment managers. When you work with a trusted partner all of these services can continue without interruption, generation after generation.
Note: This memo focuses on the potential benefits of trusts, but please keep in mind that estate planning can be a complicated endeavor. The pros and cons of creating a revocable or irrevocable trust are influenced by a wide variety of factors, including the specific type of trust you are considering, the costs of establishing and maintaining the trust, and your family’s unique financial profile. If you have any questions about the federal estate tax or your family’s estate plan, please don’t hesitate to contact Nici Law Firm by phone at (239) 449-6150 or on the web at nicilawfirm.com.
This document is intended to convey to you the principal characteristics associated with estate planning using trusts, including ways to protect a beneficiary’s inheritance from creditors. For this reason we have deliberately simplified technical aspects of the law in the interest of clear communication. Under no circumstances should you or your other advisors rely solely on the contents of this document for technical advice nor should you reach any decisions with respect to this topic without further discussion and consultation with an attorney. Revised February 2017.