Don’t throw away that trust!

Now that the exemption from the federal estate tax has hit $2 million, some married clients have questioned whether they still need their trusts. After all, the trusts were made to avoid the tax, and now the tax threat for them has disappeared.

Fact is there still may be reasons to retain or establish a trust.

There are two at-death exemptions from the federal estate tax. First is the spousal exemption, which is normally unlimited. This means one spouse can transfer unlimited amounts to the other at death (during life as well) without paying taxes. Second is the lifetime exemption, which stands at $2 million (to rise to $3.5 million in 2009). This is the amount that can be left to anyone other than a spouse without paying estate taxes.

Someone who dies leaving every­thing to a spouse gives up his or her lifetime exemption. Using a bypass trust allows a decedent to use his or her lifetime exemption, saving hundreds of thousands of dollars in estate taxes if the joint estate exceeds $2 million.

There are incentives other than the estate tax for establishing trusts during lifetime:

  • Privacy. Properly-titled trust assets pass outside the public process of court probate;
  • Planning for efficient management of one’s affairs in the event of incapacitation;
  • Reduction or elimination of the expense of probate.
  • Planned payments of bequests to heirs beyond the age of majority.
  • While there may be many advantages of having a trust, establishing and managing one is not cost-free:
  • Legal fees are paid to have an attorney draw up the documents;
  • Continuing legal fees (or the expenditure of personal time) are paid to fund the trusts and to manage them during lifetime.
  • Further legal fees may be paid to amend or rewrite the trusts when tax laws change.

You can see that the decision about whether to form or retain a trust is not simple. However, with proper consideration of the facts and circumstances and professional counsel, this important estate-planning issue can be resolved.