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New tax laws alter estate planning strategy

California estate planners and those who benefit from trusts and investment income have observed with interest as higher income taxes and the national 3.8% increase in investment income taxes take effect. This has substantially raised the tax bill for nearly all trusts, causing estate planners to look for creative ways to minimize the tax burden.

Trusts are legal entities created for a variety of reasons, and often to provide for the financial health and well-being of their beneficiaries. They let the planners shift property and assets to the trust which is operated by a trustee. This avoids probate and in some cases estate taxes, and allows the trust to take a more active role in the long-term distribution of funds to inheritors.

The American Taxpayer Relief Act recently added a new 39.6% marginal tax rate that applies to income over $400,000 for individuals, but on income in excess of $11,950 for trusts. The 3.8% Medicare surtax also applies to trusts starting at the lower level. This is leading to creative attempts to shelter trusts from some of their tax liability. Some trustees are investing in tax-exempt securities such as municipal bonds, while some are choosing to make larger distributions to the trust beneficiaries. Authorities on the issue point out that some trusts are in their third or fourth generation of beneficiaries, so they are more likely to be below the bracket for the new taxes.

Although these options and others have been utilized by experts in the field, they are not necessary for all situations. Avoiding taxes is not always the primary purpose of a trust, and the intentions behind the trust’s foundation take precedence. However, the increase in income taxes is likely to be a factor for some time, and estate planning attorneys will be taking this into account.

Source: CNBC, “Estate planners shift gears in new tax environment“, Andrew Osterland, March 21, 2014


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