What can a trust do for you?

You may have heard that parts of the Trump-era “Tax Cuts and Jobs Act” (TCJA) will expire at the end of next year. Notably, the current estate tax exemption of almost $14 million per person is scheduled to sunset at the end of 2025. If/when the TCJA expires, that exemption will fall in half unless Congress takes action.

Individuals that have more than $7m in assets or couples with more than $14m should evaluate their strategy if this expiration comes to pass.

To that end, we are sharing a series of articles about trust and estate planning. You’ve probably heard about trusts, but you may or may not know how they work and how to use them. A trust is an incredibly powerful financial tool that allows an individual to transfer assets to a trustee, who then manages these assets for someone’s benefit. That’s it! Sounds simple, right?

Well in some ways, they are very simple. But they also offer wonderful flexibility, allowing us to tailor your trust to meet a range of goals, including asset protection, tax planning, and ensuring the financial security of beneficiaries.

Key Components of Trusts

All trusts have the following 4 elements:

1. Grantor (or Settlor): The person who creates the trust and transfers assets into it.

2. Trustee: Individual(s) or institution(s) responsible for managing the trust’s assets in accordance with the terms laid out in the trust document.

3. Beneficiary: The person or entity that benefits from the trust.

4. Trust Document: The legal document that outlines the terms and conditions of the trust, including how assets are to be managed and distributed.

Possible Trust Uses

What makes trusts incredibly powerful is that they have nearly limitless uses. Not all of these uses are related to estate taxes. In fact, many aren’t!

Trusts are essentially legal vehicles that can have any range of characteristics. You can use them to achieve a wide range of goals. However, keep in mind that there are often tradeoffs between goals. For example, you might use a trust to minimize estate taxes, but it could cause higher capital gains taxes over time. As a financial advisor, our job is to help you navigate these tradeoffs.

Below are some common uses for trusts:

1. Asset Protection: 

Some trusts can protect personal assets from creditors and lawsuits. By placing assets in an irrevocable trust, you can shield them from legal judgments and creditor claims, as the assets are no longer considered part of your personal estate. This can be valuable for senior citizens who are worried about being sued after an accident, or for small business owners in litigious industries.

2. Estate Tax Planning: 

Some trusts can also reduce estate taxes. A common tactic is to gift assets into an irrevocable trust, thus removing those assets from an individual’s estate for inheritance tax purposes. 

3. Income and Capital Gains Tax Planning:

There are even ways to use trusts to minimize your income taxes. For example, a “NING” trust allows you to move income-earning assets into a Nevada trust, thus not paying home state taxes on that income. Note, this was recently banned for California and New York residents. 

There are also trusts for reducing your capital gains taxes on investments. For example, let’s say you bought certain stocks for a very low price, and now they have appreciated dramatically. An upstream basis trust can be used to eliminate this capital gain and get a stepped up basis. 

4. Special Needs Planning:

Trusts can be used to create special provisions for special needs individuals. For example, Special Needs Trusts (SNTs) are created to provide for the long-term care of a disabled beneficiary without disqualifying them from government benefits like Medicaid or Supplemental Security Income (SSI).

5. Medicaid Eligibility Trusts: 

These trusts can help an individual qualify for Medicaid if they have too many assets or income. A Medicaid Asset Protection Trust moves assets out of an individual’s estate for the purpose of qualifying for Medicaid. A Miller or Qualified Income Trust is a trust that can reduce an individual’s Medicaid-counted income.

6. Charitable Giving:

Charitable Trusts, such as Charitable Remainder Trusts (CRTs) and Charitable Lead Trusts (CLTs), allow individuals to support charitable causes while receiving tax benefits and generating income.

7. Business Succession Planning:

Trusts can be used to ensure a smooth transition of business ownership. By placing business assets in a trust, you can dictate how the business should be managed and who should receive ownership interests.

8. Blended Families:

Trusts can offer a way to balance the needs and interests of children from previous marriages with those of a current spouse. A Qualified Terminable Interest Property (QTIP) trust, for example, allows the grantor to provide income for a surviving spouse while preserving the principal for children from a prior marriage.

9. Incentive Trusts:

These types of trusts set conditions or "incentives" that beneficiaries must meet to receive distributions. This could include earning a college degree, maintaining a job, or avoiding substance abuse.

Next steps

We hope this short article was informative and made you think about how trusts could be better utilized in your financial planning. Subscribe and stay tuned for more. We will be writing about each of these types of trusts and sharing some additional considerations.

If you think one of the above trusts might be right for you, contact us! At Toups Capital Advisors, we are fee-only fiduciaries who don’t make any money from commissions on the financial products we recommend, unlike many advisors and some large banks. We always put your financial well-being first. Initial consultations are always free.