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How to Avoid the Disadvantages of a Trust

Estate planningKnowing the disadvantages of a trust can help you draft language to avoid them.  

There are a lot of benefits of trusts. I have myriad blog posts on those benefits. However, if you aren’t working with an experienced estate planning attorney, the disadvantages of a trust can catch you unaware. The disadvantages of a trust is something I have not spent much time discussing.  The reason that's true is that I include mitigating language in every trust I draft that solves these issues. However, I may not have drafted your trust. (why not?) Therefore, your first step should be to learn what those disadvantages might be so that you can be certain those pitfalls have been avoided in your trust.

Trusts can save on estate taxes but with today’s higher estate tax exemption, your trust should give priority to language that eliminates the possibility of your beneficiaries incurring higher income tax rates instead of incorporating language that avoids estate tax (although if the estate tax is an issue, language that avoids both is preferable).  While the “grantor” (Trustmaker) of the trust is living, the trust is viewed by the IRS as a pass through entity for income tax purposes. So that means that there is no change in tax treatment for the Trustmaker. However, unless the appropriate language is employed in the beneficiaries’ trust shares, their inheritance might be subjected to payment of income tax at the top tax bracket.  If that earned income exceeds $12,400,(2016) an additional 3.8% net investment income tax will apply as well. 

Often, beneficiaries' trusts provide the asset protection to its beneficiaries.  Without a clear understanding both asset protection and the likely needs of the beneficiaries, the language employed to provide the asset protection can be needlessly overbearing.  Typically, it is only when drafting a special needs trust that the beneficiary must cede control over their trust assets to the Trustee of the trust; even so-called ‘spendthrift’ trust allow a beneficiary to be a Co-Trustee giving them some level of control.  All of this is to say that there are to avoid surrendering absolute control while keeping the protective components of a trust. The rules are complex, so leave the drafting of a trust to a knowledgeable trust and estate attorney.

You can register for a workshop on this topic as well as a variety of other topics of importance to you and your loved ones.  Even better, you can request a consultation by calling 757.259.0707 or online by pressing the ‘request a consultation’ button you will find on our website.

Reference: NJ 101.5 (August 3, 2016) “The disadvantages to trusts”

 

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