People commonly invest in trusts as part of their estate planning strategies. Trusts can be an effective tool if used correctly. However, it is necessary to adapt to changing tax laws which affect how trusts are taxed. The recent fiscal cliff tax agreement and other changes in tax laws have prompted many in Florida and elsewhere to adjust their estate planning strategies.
One estate planning technique which many people are utilizing in the wake of the new estate planning and tax law environment is known as ‘sprinkling’ or ‘spray’ trusts. This strategy involves moving more assets which produce income to irrevocable trusts and then distributing the income to heirs. If the heirs are in a lower tax bracket, this can help a family avoid a higher income tax bracket as well as an increased Medicare tax. One may also need to take the alternative minimum tax rules into consideration as well.
If a person is a current beneficiary in the trust while his or her heirs are listed as beneficiaries upon the person’s death, he or she may want to consider using another helpful estate planning technique known as ‘decanting.’ This strategy involves moving assets from one trust into another one in order to obtain improved tax or legal benefits. However, each individual case is different; therefore individual circumstances should be analyzed before deciding to take this route.
When adjusting investment strategies for trusts, one must make sure to follow the proper legal procedures to ensure assets are properly transferred. Also, these recent changes may only be the beginning of a series of changes in current estate planning rules that are applicable in Florida and elsewhere. Therefore, it is necessary to keep an eye on proposed legislation which may require another adjustment in estate planning strategies, particularly with regard to investments in trusts.