If someone says you need a trust as part of your estate plan, you should speak with an experienced estate planning attorney before moving forward. A recent post from NJ 101.5, “The disadvantages to trusts,” notes that there are situations when a trust is not the right planning tool.
Trusts can have many advantages, such as avoiding probate, providing asset protection, and can even help you save on estate taxes; however, the types of trusts available can be confusing. You can potentially increase tax liability if you use the wrong type of trust, or if you don’t consult with a knowledgeable attorney after the death of a “grantor,” or trustmaker. Certain types of trusts have to pay income taxes on the income they generate by the assets they hold. Such trusts hit the top bracket at a very low income threshold: $12,400 of taxable income in 2016. The top income tax bracket for an individual doesn’t happen until his or her income exceeds $415,050.
So, when a trust is being used for estate tax planning purposes, it’s smart to measure the estate tax efficiency of the trust versus the potential income tax inefficiencies of the trust, if it’s tax that you’re most concerned about. These tax rules are in effect when the trust pays its own taxes.
In much of modern estate planning, however, a trust will be a “grantor trust,” which means that the grantor of the trust is still treated as the owner of the trust’s assets for income tax purposes. As a result, since the income of the trust is taxed to the grantor, the trust would not affect the amount of taxes paid.
An estate planning attorney will be able to help you maintain control over your assets while benefiting from the protective characteristics that a trust provides. These are complex legal instruments and should only be created with the help of an experienced estate planning attorney.
Reference: NJ 101.5 (August 3, 2016) “The disadvantages to trusts”