What trusts can do for you and yours

You can call the shots long after you're dead and gone if you set up a trust while you're still around.

5 benefits of trusts

  • Avoid estate taxes
  • Safeguard privacy
  • Protect assets for heirs
  • Retain control
  • Bypass probate

1. Avoid estate taxes

The estate tax exemption has been set at $5 million, indexed each year for inflation. That means that in 2013, estates of more than $5.25 million, or $10.5 million per couple, will be taxed at 40 percent. Using irrevocable trusts, you can make sure most or all of what you leave behind makes its way to the people or charities you desire, rather than to Uncle Sam.

"Very often, people with significant assets start to think about passing assets to the next generation in a tax-efficient manner," says Lisa A. Schneider, an attorney at Gunster in West Palm Beach, Fla., who specializes in estate planning. "If a client's assets exceed the applicable credit amount against estate taxes -- in other words become taxable to the estate -- they would look at making leveraged irrevocable gifts via an irrevocable trust in order to remove appreciating assets from his or her estate at a discount. There are varying types of irrevocable trusts."

Estate taxes

Year of deathFederal estate tax exemptionHighest rate on "excess" property
2007 and 2008$2 million45% in 2007 and 2008
2009$3.5 million45%
2010Tax repealedTax repealed
2011$5 million35%
2012$5.12 million35%
2013$5.12 million (inflation adjusted)40%

While assets transferred to a properly executed irrevocable trust generally escape estate taxes, there's a catch: You cannot generally undo them. They are a done deal. A "fait accompli." No turning back.

Avoiding estate taxes is a good reason to create an irrevocable trust, but the average person would consider other types of trusts, not for tax purposes, but for other benefits. In this case, living, or revocable, trusts might be the answer. With this type of trust, you still own the assets and are not avoiding estate taxes or your potential creditors, but you have more flexibility and can change any part of the trust while you are alive.

2. Safeguard privacy

If you do estate planning, your assets will be distributed either via trusts or through a will. The one you choose depends on how important you deem your privacy and the privacy of your family.

Wills are filed in the county courthouse and are open to public scrutiny. Both irrevocable and living trusts are private documents, the contents of which are only open to your beneficiaries.

"If a person has a living trust, their will just says, 'I leave all of my belongings to my living trust,'" says R. Marshall Jones, an accredited estate planner and principal at Jones Lowry in West Palm Beach, Fla. "It doesn't have all the provisions in it to provide for grandchildren and children or special needs cases or whether your spouse gets the income, et cetera."

Experts recommend that you explain unequal distributions of assets or deliberate exclusions of heirs to avoid family fighting and legal battles. However, if you place such deeply personal disclosures in your will, they will become public knowledge.

Edward W. Gjertsen II says he knows from firsthand experience that some investment firms plumb through these public records to drum up business. A former board member of the Financial Planning Association and vice president of Mack Investment Securities, Gjertsen says that at one job early in his career, he was instructed to obtain these records and hand them over to a financial representative, who would then contact a family member of the deceased.


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