The estate and gift tax elements of the American Taxpayer Relief Act extended the favorable rules that were previously in place. The $5 million exemption, adjusted for inflation, was made permanent—as well as the rules on portability of the exemption for married couples (i.e. $10 million per couple). The tax rate on estates over that threshold, now $5.45 million per person, was bumped up to 40%, reports CNBC in “What's the difference between an inheritance and a trust?”
This means that the estate tax now only affects about 0.2% of the population, translating to about 600,000 Americans. This was one of the big reasons why people set up trusts over the last 20 years…to avoid estate tax consequences.
Now folks are looking at income and capital gains taxes. Trusts aren’t the best for those, as heirs who receive assets through trusts versus an inheritance at death don't get a step-up in cost basis on assets like stocks and real estate. If a couple has less than $11 million, there’s no good rationale for creating a trust just for tax purposes.
Trusts are still a very useful way to provide for the administration of property and wealth for families and for philanthropy. They’re also a key component of an estate plan, along with a power of attorney and a will.
In addition, a trust is a powerful vehicle for people to manage assets for themselves, their families and other beneficiaries both during their lifetime and after they pass on. You have the ability to transfer assets to children in a controlled manner and can allow people more control over how assets are made available to others.
When it comes to creating trusts, first determine what you want to achieve. Then sit down with an experienced estate planning attorney to see what types of trusts can help you meet those goals.
Reference: CNBC (July 6, 2016) “What's the difference between an inheritance and a trust?”