Should I set up a trust?

As a CPA and the trust and estates tax specialist at Harper & Company CPAs Plus, I work with clients on a variety of complex tax situations. I am often asked questions like, “Should I set up a trust?” Or, “When should I set up a trust?” Or, commonly, “My loved one passed, and I have no idea what do with this trust (or estate).”

Here is some basic information about trusts that everyone should know.

Why set up a trust?

The key reason to set up a trust is to protect your assets.  Once you pass away, the assets held in a trust are not subject to probate. 

When assets become subject to probate, they can be held up for months in our court system. You also have to pay an attorney to represent you as the executor or trustee. With a trust, there is no hold up in distribution of the assets to your beneficiaries the way you choose for them to be distributed. 

You have worked your whole life to accumulate the assets you have. You should be able to control what happens to them long term.

For example, if you are a parent and choose to name your children as beneficiaries, you can dictate how the assets are managed once you die. You have complete control over how and when your assets are disbursed in a trust. Often, I see trusts with portions or percentages of distributions set to occur at certain ages. 

Are there tax benefits to having a trust? 

If I had a dime for every time I’m asked this question…and it is a very good question!

The short answer is it ‘depends.’

Trusts are designed more for asset protection and how you want those assets to be managed, distributed, and invested. The tax implications from the distribution of assets lie with the trustees. Trusts have a maximum tax rate (37%) of anything above $13,500 of income in a year. In an irrevocable complex trust, with annual income above $13,500 for example, we may recommend the trustee elect a 65-day distribution, where you have 65 days to pass out that excess income. Why would someone choose to do this? Often, it is because that income will be taxed at the beneficiaries’ tax rate which is often lower than 37%. 

By setting up an irrevocable trust, you can transfer assets out of your estate resulting in potential transfer tax benefits where the assets and any appreciation are being sheltered from estate tax after you pass.  In addition, you can make annual gifts to the trust up to the annual exclusion of $15,000 for individuals and $30,000 for married couples filing a joint return without incurring any additional gift tax.

At what point should you think about setting up a trust?

This is a very individual decision, and it’s different for everyone. The short answer is that if you have assets to protect, you should consider setting up a trust. A revocable trust established during your lifetime can help your family manage your assets by assigning a trustee to make distributions and pay bills.  Or, if you come into a significant amount of income such as proceeds from sale of a business or real estate as an example, that is another reason to set up a trust. 

If you need help navigating the complexities of trusts and estates, I am here to help. To ask questions or schedule time with me, I can be reached at (614) 456-7222.

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