Accounting

A Time for Legal Trusts

A declining stock market, inflation and an upcoming decreased federal gift and estate tax exemption may make it an ideal moment to utilize trusts.

By George N. Saliba, Contributing Writer On Dec 7, 2022

Removing assets from an estate and placing them into various legal trusts can help shield these assets from future divorces, provide protection from creditors, care for loved ones with disabilities and/or ensure that wealth is passed through a family’s generations. Among their many other uses, trusts can also yield myriad tax and estate planning advantages.

Case in point: The $12.06 million federal gift and estate tax exemption expires year-end 2025, so reducing the size of one’s estate before that date can be a crucial planning move for those who seek to lower their future estate taxes; pouring monies into trusts can achieve that. In New Jersey, where nearly 10% of households have more than $1 million dollars in assets – and thousands of people possess exponentially greater wealth – this may be especially important.

And a declining stock market, which includes an S&P 500 stock market index down more than 20% this year, may also facilitate the use of trusts: Gifting stocks into trusts not only removes those assets from one’s estate, but also captures future stock market growth within those trusts, for the trusts’ beneficiaries, explains Courtney E. Dolaway, a member of Flaster Greenberg PC’s trusts and estates, taxation, and business and corporate departments.

High inflation may be another reason to consider leveraging trusts. Dolaway says, “With inflation, a lot of assets are going to appreciate, and any time you have appreciating assets, [for] those that have been gifted to a trust … that appreciation is outside of the grantor’s estate.”

Stuart M. Gladstone, member of the firm and co-chair of the trusts and estates practices at Brach Eichler LLC, with New Jersey offices in Livingston, explains in broader terms: “A gift or a sale to a trust will remove the asset from your client’s estate, but interestingly enough, [it] can still allow for the … spouse, children and grandchildren to have access to those assets. And even the grantor can have access through certain provisions like being able to make loans.”

Trusts: Separate Legal Entities

Monies moved into trusts clearly do leave a person’s estate and are no longer among their assets. Gladstone says, “There are common traits in clients, and maybe in all of us: ‘I would like to reduce my federal estate tax exposure, and I would like to have total control of all the money.’ The Internal Revenue Code is set up to prevent that … they [instead] want to allow a gift that reduces the estate to only occur if there has been some separation from dominion and control of the assets. The tax lawyer’s job is: ‘Okay, how close can I get to telling [someone]: ‘This is out of your estate, but you still have ‘control’?”

Self-Settled Asset Protection Trusts

One way to arguably have a bit more control and have asset protection is via self-settled trusts, where the grantor (the person forming the trust) and the beneficiary are essentially one and the same. Although self-settled trusts are at times used by professionals in high-lawsuit-risk professions, New Jersey does not allow them. However, attorneys here can nonetheless facilitate establishing them for the benefit of New Jersey residents in other states including, but not limited to, Nevada, Delaware and South Dakota.

“In New Jersey, regardless of who the trustee is – even if it’s an independent trustee – if you set up the trust and retain a beneficial right in it, it’s still subject to your creditor claims. And that’s why you go out of state for that planning,” explains Steven A. Holt, chair of Roseland-based Mandelbaum Barrett’s taxation, trusts and estates and charitable organizations department, and a member of the firm’s executive committee.

Generation-Skipping Trusts

Trusts can meanwhile operate for entire families: Generation-skipping or “dynasty” trusts can preserve wealth in a family by allowing appreciating assets to pass through the generations without tax, thus maintaining value. For example, a person can place millions of dollars into a trust for the benefit of a spouse and children; when the spouse dies, the monies stay in trust for the benefit of the children; when the children die, it remains in trust for their children.

Choosing the Correct Trust

Although New Jersey may have the most per capita millionaire households in the United States, families here with lower net worth can also avail themselves of a range of trusts.

“For every income level or principal level, there are different trusts that may be suitable for every client,” Flaster Greenberg’s Dolaway says. “And that’s why we have our estate planning meetings with people where we talk about their wishes, desires and assets. We kind of do a full scope review, because, for example, if you have a child with a disability … you don’t [need] a million dollars for a special needs trust to make sense.”

Attorneys say there are many extraordinarily complex options that should be considered for various trusts and net worth levels, as well as many varied and strategic advantages to using trusts. Gladstone says overall, “I know certain practitioners who say that if you plan for high-net-worth individuals and haven’t used a trust, they wonder whether it’s malpractice; that’s how strongly tax lawyers feel about using trusts.”

Coordinating Experts

While trusts and estates attorneys have specialized expertise, wealthy clients may work with a bevy of other experts such as wealth management advisors, accountants and general practice/family attorneys. Coordination is key.

Mandelbaum Barrett’s Holt says, for example: “Someone could theoretically create a trust and not really have the tax background, and do a terrific job of it, but have they created a tax problem for their client? That’s a function of how large the estate is, how big the trust is, how long it lasts, who the beneficiaries are, who the trustees are … those things all impact the taxation … for income tax purposes or estate tax purposes.”

Conclusion

With so many trust-related benefits and options available, consulting with a highly trained attorney may mean significant monetary and strategic advantages for families and their loved ones. “I’ve had [new] clients very angry at prior lawyers who did not use trusts,” Brach Eichler’s Gladstone says. “I’ve also had people who said, ‘Had I known about it, I would have taken advantage of generation-skipping [trusts]; nobody ever talked to me about it.’ Those are the kinds of things I’ve seen.”

He adds, “People should know what the options are … the types of trusts that are out there.”

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