Irrevocable Trusts:
Fixed Terms: Once established, terms cannot be easily changed.
Tax Benefits: Offers potential #tax advantages, as assets are removed from the grantor's estate.
Protection: Provides greater asset protection from creditors.
Estate Taxes:
Currently, the unified credit for #estate taxes is substantially high at $12,920,000 per individual and $25,840,000 for married couples, which means that it is not a tax concerns for most taxpayers. Nevertheless, this significant credit is scheduled to end on December 31, 2025. Absent legislative changes, the credit will revert to approximately $5,490,000, potentially adjusted to around $6 million per individual (or double for couples) due to inflation, starting January 1, 2026. This impending reduction will likely prompt more Americans to consider estate taxes and strategies like establishing trusts. By placing assets into an irrevocable trust, these assets are effectively removed from the grantor's taxable estate, thus potentially reducing, or eliminating the federal estate tax liability upon their death.
At the state level, estate taxes can vary significantly. Some states, like Connecticut and Vermont, have a flat estate tax rate. For instance, Connecticut taxes estates over $9.1 million at a 12% rate, while Vermont taxes estates over $5 million at a 16% rate. Other states have different estate tax rates and exemption levels, with Oregon having the lowest exemption at just $1 million. In states with estate taxes, the rate often increases with the value of the estate. For example, Hawaii and Washington have the highest estate tax rate at 20%, while Maine's rate is 12% for estates over $6,410,000.
In Texas, the estate tax situation is notably different compared to some other states. Texas does not impose a state-level estate tax or inheritance tax. This means that for residents of Texas, only the federal estate tax would apply, with its exemption threshold of $12.92 million in 2023.
Additionally, some states offer a Qualified Terminable Interest Property (#QTIP) deduction, allowing property placed in a trust for a surviving spouse to qualify for a special deduction. This can further reduce the taxable value of an estate.
Protection:
Trusts, both #revocable and #irrevocable, have played significant roles in various legal scenarios, impacting people of different financial backgrounds. Here are some notable cases that illustrate how trusts have been used and interpreted in legal contexts:
Kaestner 1992 Family Trust Case (US Supreme Court): This case revolved around a trust created by Joseph Lee Rice III. The trust had no connections with North Carolina until one of the beneficiaries moved there. The Supreme Court held that North Carolina did not have the minimum connection to tax the trust income that was not distributed to the beneficiaries, who had no right to demand that income and were uncertain ever to receive it.
Victorian Court of Appeal Case (Australia): In a landmark case, the court found that the trustee of a $23 million family trust failed to exercise "real and genuine consideration" for two of the three children of the family. This decision highlighted the responsibilities of trustees in managing trusts and ensuring fair treatment of all beneficiaries, impacting how trusts are administered, especially in cases of family disputes.
Various Cases Reviewed by McGuireWoods: A selection of cases reviewed by McGuireWoods demonstrates the diverse applications of trusts in legal scenarios. These cases cover topics such as the duties of trustees in distributing trust assets, the implications of spendthrift trusts in criminal cases, and the jurisdictional issues surrounding trusts. For instance, the case of "United States v. Argyris" revealed that a spendthrift trust does not protect assets from a writ of garnishment when a federal court orders restitution in a criminal case.
These cases illustrate the complexity and versatility of trusts in legal matters, showing how they can be used to manage and protect assets, but also highlighting the responsibilities and limitations that come with them.
How Can #Investors Use These Trusts?
Investors in real estate funds can use these trusts to manage their estate planning and asset protection strategies. Revocable trusts offer flexibility and control, suitable for investors who prefer hands-on management and are comfortable with the assets being part of their taxable estate. In contrast, irrevocable trusts are fitting for those seeking to mitigate estate taxes and protect assets, albeit with less control over the trust's terms.
Disclaimer:
The information provided in this bulletin is for educational purposes only and is not intended as legal or tax advice. Professional advice is recommended to address individual estate planning needs.
