Protecting Your Legacy: Estate Planning Insights

Rick Chalifoux, Senior Trust Officer, First Republic Private Wealth Management
January 26, 2021

Estate planning is a necessary part of preserving your wealth and legacy. While it may appear intimidating at first, careful planning is key to help you avoid legal and tax challenges for your beneficiaries. In particular, trusts can minimize tax obligations, determine how you want your assets to be utilized by your beneficiaries, and ensure that your wishes are clear and legally binding after you pass away.

Trusts provide a significant amount of flexibility but also require careful consideration of your current needs and future wishes. Ever-changing family dynamics and tax code changes require that you regularly review the terms of your trust to ensure that your plan is current and that your wishes will be met.

The variety of available options can seem overwhelming, whether you’re just starting to plan your estate or reviewing your existing plan to keep it up to date. No matter where you are in the process, reviewing a few basic concepts can help ensure that you’re on the right track.

How trusts affect estate planning

Trusts offer several important estate planning benefits, including protection from legal issues after death, implementing your wishes for the distribution of your assets, and tax considerations that can help ensure that your beneficiaries receive your assets in the most tax-efficient manner. Trusts can be created during your lifetime or contained in your will to take effect after your death.

Creating a trust

A trust has three main parties: the grantor/settlor who creates the trust, the trustee who’s responsible for the administration of the trust and the beneficiary for whose benefit the trust was created. Trusts can be funded with some or all of your assets during your lifetime or upon your death. You, as the grantor, can craft the terms of the trust document to provide direction to the trustee on when and how funds are to be distributed to your named beneficiaries, and the trustee serves as an independent arbiter to carry out those wishes.

There are two major types of trusts: revocable and irrevocable.

  • Revocable trusts can be amended or revoked by the grantor. Revocable trusts allow for greater flexibility to change or update the terms of the trust due to tax law changes or changes in the grantor’s estate plan. Usually, the grantor is also the trustee of a revocable trust, and the grantor can choose a successor trustee in the event of their disability, incapacity or death.
  • Irrevocable trusts, on the other hand, cannot be altered, except in very few situations. Once funds are added to the trust, they’re no longer controlled by the grantor and can only be distributed to the grantor if permissible under the terms of the trust and with the trustee’s approval.

Legal considerations

Upon your death, your will is submitted to the court and becomes a public document. Many people create trusts during their lifetime to avoid the legal process and keep their family matters and wishes private. Additionally, trusts can offer protection from disinherited family members who may want to contest your will, as well as protection from your creditors and future protection from creditors of your beneficiaries.

With a trust, your assets are held by your trustee who has an ethical and legal fiduciary responsibility for those assets. Fiduciary responsibilities include the duty of loyalty, the duty of impartiality and the duty of care to the beneficiaries. Your trustee is required to carry out the terms of the trust as you have written, and their responsibilities shouldn’t be taken lightly.

Tax planning

Under 2022 tax law, each individual can gift up to $16,000 annually to another individual without any gift tax consequences. A gift tax is a tax that’s imposed at the federal, and potentially state, level on the transfer of property over certain amounts. In addition to this amount, each individual can transfer up to $12.06 million during their lifetime or upon their death without any federal estate tax consequences. This amount is indexed for inflation and increases slightly every year. Unless current tax laws are amended, this amount will revert to $5 million (inflation indexed) after 2025. In addition, there has been discussion that this amount may be reduced by the incoming administration and Congress before 2025. For this reason, many individuals are taking advantage of the current amount and creating trusts during their lifetimes to pass assets to their loved ones. The trust assets will then grow outside of their estates, and the appreciation on these assets are free from estate taxes in the future.

States also have their own estate tax rules. Some states, such as Florida, have no estate tax. Other states, like New York, have an estate tax with a lower exemption. It’s important to consult with your tax professional to determine the rules in your particular state.

Incorporating a trust into your estate planning

Establishing a trust for the first time shouldn’t be overwhelming. The right team can help guide you through the variety of available options, determining which type of trust is best for your personal situation. They can also advise you on how to develop rules regarding distributions to your named beneficiaries.

Whether you’ve established a new trust or already have a trust within your estate plan, it’s essential to revisit the terms of the trust to ensure that they meet your current wishes. A revocable trust, much like a living will, isn’t designed to be set up once and never reviewed again. The circumstances of your life, as well as those of your heirs, may change. Making sure that your overall estate plan is updated to reflect major life milestones, such as the birth of a child or grandchild, is essential if you plan to provide for them.

As the lifetime exemption amount may change in the coming months or years, there has never been a better time to speak to a First Republic professional about getting started. You’ve worked hard to create wealth over your lifetime, and ensuring that your assets go to those you care about is the best possible way to keep your legacy intact.

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