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Is a trust right for my situation?

In our last post, we spent some time discussing how those who enable their loved ones to inherit valuable assets upon their passing -- real estate, stocks, etc. -- will ensure that they secure what is known as a step-up in basis, meaning an avenue through which to escape rather costly capital gains taxes.

By way of example, we discussed an elderly mother who left her adult children stock valued at $100,000 on the date of her passing and the cost basis of which was only $10,000. Due to the step-up in basis, here the adult children would not have to pay capital gains tax on the $90,000 in gains, and would only be responsible for paying capital gains tax on any profits realized after they inherit the stock, such as any post-inheritance sale.

While most people might not realize it, when loved ones are given valuable assets like these via a trust, this step-up in basis is actually forfeited.

Indeed, this reality coupled with the fact that 1) income from the trusts exceeding $12,300 is taxed at the highest marginal tax rate (39.6 percent), and 2) the current federal estate tax exemption currently sits at a generous $5.45 million ($10.9 for couples) may have some questioning whether there is any need for them to consider the creation of a trust at all.

Like almost any legal issue, there is no definitive answer to this question.

While it's true that an individual or couple with assets totaling less than the federal threshold may need to consider whether creating a trust solely for tax purposes is a worthwhile endeavor, experts nevertheless urge people not to overlook how trusts can serve other valuable purposes.

For example, creation of a trust allows a person to manage assets during their lifetime, and ensure that they are divided and ultimately transferred to heirs in a controlled and reasoned manner upon their death. In fact, trusts can help ensure that the distribution of trust assets and/or proceeds to loved ones whose judgment in money matters is questionable is managed by a trusted party.

This is not to mention, of course, that trusts can be used to fund a favored philanthropic cause.

What all of this really serves to underscore is that every person's estate planning situation is unique from their assets to their objectives. Indeed, given the multitude of channels through which these objectives can be realized and other important legal considerations, it is imperative to consider discussing things with a skilled legal professional.   

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