Since the federal estate tax exemption became over $10 million per person, and that exemption will be around through 2025, some people are regretting their choice to do estate planning using an irrevocable trust. For those who now have no purpose to have an irrevocable trust, the higher income tax costs for trusts than individuals is a bitter pill, and many are seeking ways to terminate their trusts. One Forbes blogger called the phenomena “donor remorse.”
While fewer people now need the tax shelter from federal estate taxes, there are still plenty of reasons why an irrevocable trust may be the right choice for you.
1. The Minnesota estate tax exemption is only $3 million. While this may not sound like a low exemption amount, it doesn’t take much to exceed it if you own a home, have an investment account, have a cabin, and have a life insurance policy. The Minnesota estate tax rate varies based on your estate and range from 9% to 41%. It can be well worth putting that life insurance policy into an irrevocable trust to keep it out of your Minnesota taxable estate, putting your home or cabin into a qualified personal residence trust, or using one of the charitable irrevocable trusts to do some social good.
2. Your grown children are irresponsible or unhappy in their marriage. We all wish for our children to grow up and be responsible people with happy lives, but that doesn’t always happen. Sometimes children grow up and have credit issues, or substance abuse problems, or marital issues that may end in divorce. A spendthrift trust can allow you to gift your assets to your children without granting them control themselves, making the assets inaccessible to creditors and ex-spouses. The money is protected until a payment is made to the beneficiary.
3. You are in a business that makes asset protection a wise choice. Professionals who could be sued for professional errors or malpractice and people with business that involve high financial risk from market volatility can benefit from domestic asset protection trusts. Even the average small business owner may benefit from an asset protection trust. According to the National Federation of Independent Business, people target small business owners for lawsuits, even frivolous ones, because they think that small business owners are more likely to settle than carry the case through litigation. You are less of a target when your assets are inaccessible, and you can still have the trust income be available to support your family during your lifetime.
4. You want to make lifetime gifts to your children and/or grandchildren. You can make gifts to anyone you like tax free up to the IRS’ annual qualifying exclusion amount, but those gifts have to be a “present interest” to qualify (as opposed to a future interest, which would be future right to the funds). You may not want to give your minor child or grandchild $15,000+ per year and let them have at it outright right now, though. There is a special kind of irrevocable trust that allows you to gift up to the annual qualifying exclusion amount each year and have that gift be a present interest for gift tax purposes, but also allows you to control how the money is handled and delay distribution until your children or grandchildren are twenty-one.
5. You have a disabled family member who you want to make sure is cared for after you are gone. Special needs trusts allow you to leave assets for the benefit of your disabled loved one without disqualifying them for public assistance benefits that they may depend on, like medical care or special services.
Irrevocable trusts are not without their downsides, and your situation should be carefully analyzed before you create one as they are difficult (although not always impossible) to undo.
If you’d like to learn more about estate planning strategies for your family, call our office at (612) 206-3701 or fill out our contact form today to schedule a time for us to sit down and talk.
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