The Estate Plan: Has the current estate tax climate ended the need for trusts?

Has the current estate tax climate ended the need for trusts? Let’s hope not, because there are still valid reasons advisors should have this structure in their arsenal.

In the early part of the last decade, the most common reason for families to replace their wills with a Revocable Living Trust was to reduce exposure to estate taxes (aka death taxes or inheritance tax). With the advent of a $5 million per person exclusionary amount in the 2010 legislation,1 and with the addition of portability provisions, many might think trusts are no longer necessary. But there are many reasons trusts should still be on the financial planner’s recommendation list.

First, there are a plethora of advantages that a trust has over a will beyond just the estate tax issue. When I inquire from clients that have taken an estate through the probate process, most would suggest they would like to have their loved ones avoid that necessity if they could, mostly because the process is arduous, time consuming and costly. In our great nation, the laws say you can’t own anything when you are no longer living, and therefore the probate process is the court-supervised method we utilize to transfer assets to the proper beneficiaries.

I explain to my clients that when they establish and properly fund a trust, they no longer own any assets under the jurisdiction of the probate courts. I suggest that a trust is akin to establishing a “special corporation,” and that we move everything we own into it. We are the sole owner of this special corporation; therefore, we have complete control over everything inside it, including the right to distribute out anything we want for our use. When we pass, we have no assets owned directly in our name that would be subject to probate. The exception is this “special corporation,” which is exempt from the probate process.

When we pass, we assign new managers to run the corporation (trustees), and new shareholders to receive distributions (beneficiaries). We leave instructions for the new managers on how to run things, including how and when to make distributions to the new shareholders. For tax purposes, this new “Special Corporation” uses our Social Security number, so it is transparent to the IRS and administratively it is easy to manage.

First, there are a plethora of advantages that a trust has over a will beyond just the estate tax issue.

Less expensive than probate

The cost to establish this special corporation is typically under $3,000. In contrast, the average for attorney’s fees and court costs to probate an estate is between 4 percent and 10 percent of the assets.2 For someone with a $500,000 estate, that could easily amount to $25,000 at 5 percent.

Eliminating probate also saves the executor or personal administrator from much work. With the trust, the new managers simply step in and seamlessly continue to manage affairs according to your wishes. When removing the jurisdiction of the court, this also makes access to assets rather immediate. For some, this could be an important issue.

For others, privacy is a prime concern. The probate process is extremely public, with the executor needing to file financial records. The names and addresses of beneficiaries also becomes public knowledge. I can only imagine how con artists might attempt to use that information. With a trust, the affairs of the “special corporation” are kept confidential.

Two of the most important reasons to consider a trust have to do with what I refer to as “inheritance protection” and “spendthrift control.” If I am a beneficiary and elect (or am required to by the terms of the trust) to leave assets inside this special corporation, those assets are safe against most creditor actions, including divorce.3 Most of us would desire our kids benefit from the assets we leave behind, rather than their ex-spouse to be. If we simply have a will and leave $300,000 to our child who then deposits those funds into the joint savings or investment account, and then files for divorce one year later, chances are we’ve just left $150,000 to our child and $150,000 to the ex.

I have a client whose spouse at 33 years of age passed away in a snowmobile accident. He left behind a daughter from a former marriage, and a wife carrying his unborn child. Stating that the probate process was arduous would be an understatement for her. If I recall, she indicated the process took about four years. In hindsight, it is difficult to determine who’s greed was larger–the former spouse or the multitude of attorneys, including the independent attorney that is needed to be hired for the benefit of the yet-to-be-born child. In the end, over a third of the estate wound up in the hands of attorneys as fees, additional amounts went for taxes, and the remaining assets were split equally between the daughter from the first marriage, the spouse, and the unborn child.

But perhaps the greatest tragedy is that the unborn child is now turning 18, and has complete access to 100 percent of her wealth, including ownership of the family home. I have assisted my client in petitioning the court to move the daughter’s money into a trust to be able to restrict distributions as necessary. But the judge’s response was, “I don’t want to be sued by the 18-year-old, and therefore I won’t do it.” Our only hope is that the 18-year-old displays wisdom well beyond her years. I cannot imagine most kids that age would manage their financial affairs astutely.

All of this could have been avoided by a trust. Not only could the estate taxes and the attorney’s fees been sidestepped, but additionally the unfettered access to funds when the minor turns 18.

As I indicated, you can provide instructions to managers on how and when to distribute to shareholders (beneficiaries). In the case of my trust, when it comes to my children, a small amount of income supplement is stipulated until age 35. Before then, besides the income, I made funding available for college dependent on a C grade or better, a lump sum if getting married, a lump sum for having or adopting a child, and up to the discretion of the manager, a lump sum for starting a business if the trust manager believes the business idea to be of sound judgment. I personally would much rather have this restrictive schedule than provide unfettered access at age 18.

Many of us think that since we have adult beneficiaries, this is not a concern. But most clients would want their assets to pass per stirpes, so that if any child of theirs predeceased the client or dies in a common accident, that child’s share would then distribute to the child’s children. Chances are, the child’s children are still minors, and we may be back to desiring restricted access to funds.

“With the trust, the new managers simply step in and seamlessly continue to manage affairs according to your wishes.”

Final thoughts

I have two final thoughts. First, the portability provisions introduced in the 2010 legislation isn’t as good as it sounds, and still faces many potential challenges. The greatest of those being that for a spouse to have access to any unused exclusionary amounts, the proper tax returns have to be filed to claim it.4 Some spouses and/or their tax counsel may not be aware of that. Some may also see it as unnecessary only to have future circumstances change.

My last final thought is this. Everything changes on Jan 1, 2013 when the rules established in December 2010 expire. If Congress remains gridlocked, estate taxes come back at $1 million and a 55 percent tax rate and portability goes, too. The only thing that is certain is uncertainty.

David M. Schlossberg for the April 2012 issue of Senior Market Advisor.  David is senior partner at Assured Concepts group, Ltd., East Dundee, Ill.


  1. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010
  2. The Living Trust by author Henry Abts
  3. These comments are not intended to be legal advice. Laws vary from state to state. Please check with proper legal counsel in your jurisdiction for clarification.
  4. See for more information on portability.



Comments are closed.

%d bloggers like this: