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Is Year-End the Time to Discuss Estate Plans?

Updated: Oct 24, 2021

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While you may not have many clients that will be subject to the estate tax, everyone has an estate even if they are below the limits and not planning for your estate can be costly. As many tax pros know, getting a client to discuss estate planning is like pulling teeth sometimes. However, during tax time people are looking to handle all of their affairs and estate plans should be part of the discussion.

When thinking of estate plans, it can conjure up thoughts of a will. Whether you die intestate (without a will) or testate (with a will), the estate will likely go through probate court, which is public and in most states the taxpayer’s creditors are notified.

Wills can be contested and turn into a legal quagmire. One way out of this mess is to have clients transfer assets to beneficiaries out of probate. This is accomplished with a trust.

What Are Trusts?

A trust is a legal document comprised three parties:

  1. A Grantor or Trustmaker (the one that starts the trust)

  2. The Trustee (the person or company that controls the assets)

  3. The Beneficiaries (those receiving the assets of the trust at death)

There are also Revocable Trusts, meaning they can be changed, and Irrevocable Trusts, which cannot be changed.

A Revocable Trust or living trust is created for someone that isn’t subject to estate taxes. In the Grantor’s lifetime, they are the Trustee and control all of their assets. Upon death, there is someone else that is appointed as the Trustee, the trust becomes Irrevocable and the assets pass out of probate to the beneficiaries.

One good thing about a trust is that when the trust is created, the Grantor can put restrictions on when the beneficiaries can inherit their money. For example, if the taxpayer has younger children, the Grantor can put a drug and alcohol provision in the trust stating if the child is using drugs and alcohol they may have to stop in order to inherit their assets. Further, you can state that they must have an acceptable grade-point average or a specific age that the assets can be inherited.

The taxability of the Revocable Trust is at the Grantor level. All of the big-ticket items like a house, car, bank accounts or collectibles need to be retitled to the trust. For issues like personal effects, they would be handled through a Pour-Over Will, which will need to go through probate. However, the amount of assets the will is holding should be nominal at best.

An Irrevocable Trust, outside of not being able to be changed, does two important things: it removes any taxable assets out of the taxable estate and it provides asset protection. An Irrevocable Trust, like a Revocable Trust, has a Grantor or Trustmaker, Trustee and Beneficiaries.

The Grantor makes the trust and the Trustee is anyone other than the Grantor or Beneficiaries. It is important that once the Grantor puts the assets into the trust, or creates the corpus, the Grantor no longer has control of the asset, and using different clauses in the trust can control the ways the assets are inherited. This is why the assets are removed from the taxable estate and protected against creditors.

The taxability of an Irrevocable Trust is taxed at the Beneficiary level, for example, the corpus is never taxed. However, if the corpus is invested in securities there will be dividends or security sales taxable to the Beneficiaries. If another asset makes money or is sold, it passes-thru to the beneficiaries. Irrevocable Trusts must get an EIN and file Form 1041.

ABLE Accounts

For a child with a disability, an ABLE account may be just what the doctor ordered. ABLE accounts have been around for a few years. Before they existed you would form an Irrevocable Special Needs Trust. The issue with a Special Needs Trust is that they are held as an asset by the special needs child and can affect the amount of disability money the child receives.

With an ABLE Account you can contribute up to $15,000 or the gift tax limit. To plan each year, if you are married and elect to split your gifts you can contribute up to $30,000 per year. Most importantly, it is not considered an asset of the special needs child when they apply for benefits.

As you can see, there is a lot you can help clients do at year end.

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