By: Stacie D. Nyborg, Attorney

February 2014

Trusts have long been an important and effective method of wealth preservation, with significant advantages over other traditional mechanisms of estate planning, such as Wills.  Importantly, a properly structured estate plan that includes a trust can avoid the cost, delay, and public nature of a probate process.  Carefully drafted trusts can provide mechanisms to avoid Estate Taxes.  For these reasons, and others, trusts have been a favored tool by lawyers in structuring an effective estate plan.

As noted above, one of the main attractive aspects of trusts is the ability to avoid Estate Tax liability.  With passage of the American Taxpayer Relief Act of 2012 (the “Act”); however, significant changes occurred that somewhat diminished the value that trusts can offer with regard to Estate Tax liability avoidance, with regard to ordinary estates.  Through the Act, the gift and estate tax exclusion has increased to $5,340,000 per spouse in 2014, which essentially means that the Federal Estate Tax could apply only to estates that were larger than the $5 million exclusion and, thanks to a part of the Act referred to as “portability”, any unused portion of a spouse’s $5 million exclusion could be passed to the surviving spouse, meaning that the exclusion eliminates taxes on joint estates as large as $10,680,000.  Of course, the vast amount of estates in the United States (even in Santa Barbara) don’t amount to $5 million, let alone $10 million.  As a result, the tax benefits of setting up a trust were diminished.  One more important aspect of the dollar amount for the exclusion: it is indexed.  This means that it is adjusted for inflation.   The indexed amount for 2013 is $5.25 million and the combined exclusion/exemption is $10,500,000; in 2014, $5,340,000 and $10,680,000 combined.

Despite these changes in the law, trusts still provide an important tool for estate planning purposes, especially in community property states, such as California.  There are a number of important matters that estate planning attorneys handle for their clients through trusts that have nothing to do with taxes, including:

1. Special Needs Trusts. In many cases, and for various reasons, a parent may want to have some limitations on a child’s receipt of proceeds from the parent’s estate.  These limitations can range anywhere from the age of the child to the child having a physical and/or mental handicap.  In these circumstances, trusts provide excellent methods for both controlling the amount of proceeds that a child may receive from a parent’s estate, while also providing protection and care for the child.

2. Planning for Electing Portability. Despite the important change in tax law brought about by the Act, in order to benefit from the “portability” aspect of the Act, you must make an election to do so.  There are various aspects that may affect portability, including disparity among the relative wealth of the spouses.  These issues can be addressed in a trust, allowing the surviving spouse to take full advantage of portability.

3. Business Succession Planning. Many family-owned businesses struggle to establish a pathway for succession, providing the parent-owners a method for passing the business onto their children.  Appropriately drafted trusts can achieve this objective.

4. Planning for Education. Trusts are excellent vehicles for the payment of beneficiaries’ educational expenses, including contributions to IRC section 529 plans.

5. Real Estate. Trusts are effective mechanisms in addressing the often-cumbersome issues that arise where clients have real estate in more than one state, including ownership, asset protection, state income tax, spousal rights, and non-estate tax probate issues.

And there are more, especially the maintenance of the privacy of your family’s affairs and its value, avoiding the court’s probate process and accountings over two (2) years as well as the loss of 6% of the estate in attorney and executor compensation (statutory fees).  But everyone’s estate objectives and concerns are different.  Still, trusts remain an important and powerful tool in achieving many objectives that individuals have, and for that reason, will be a significant part of most estate plans.

Because everyone’s needs are different, we invite you to come to Buynak, Fauver, Archbald & Spray LLP and have your trust reviewed.  Or, if you don’t have a trust, it is never too early to think about how you want to take care of your loved ones when you are gone.

Stacie D. Nyborg, Attorney

SNyborg@BFASLaw.com

(Direct) 805.966.7511

This Advisor is one of a series of business, real estate, employment and tax advisories prepared by the attorneys at Buynak, Fauver, Archbald & Spray, LLP. This Advisor is not exhaustive, nor is it legal advice. You should discuss your particular situation with us or with your own attorney. Our legal representation is only undertaken through a written engagement letter and not by the distribution of this Advisor.