With a whopping $11.4 million federal estate tax exemption in place thanks to the 2017 tax reform, advisors might be asking whether trusts are still relevant to their clients’ estate plans.

They certainly are, said Robert Maloney of Squam Lakes Financial Advisors, speaking at a Wednesday afternoon breakout session at NAPFA’s 2019 Fall Conference in Chicago.

In fact, a credit-shelter trust may be just as relevant as ever, said Maloney, because it can protect assets from litigation—and Americans are becoming more litigious, not less.

“The value of credit protection is getting more and more important because more and more people are suing,” said Maloney, during a presentation called “The Value of Trusts With an $11,400,000 Exemption.” Spendthrift provisions in a will or trust document can offer additional protection from beneficiaries’ creditors.

Maloney focused on revocable, living credit-shelter trusts, which allow a grantor to pass down principal and/or income to beneficiaries, with trustees empowered to make changes within the trust, often at their sole discretion. Trusts can be powerful estate planning tools, he said.

They are also useful for sheltering assets from state taxes, which have exemptions as low as $1 million in some places, said Maloney.

Even if assets are transferred via a credit-shelter trust, Maloney still recommends filing an estate tax return to ensure the portability of the grantor’s estate tax exemption—which extends it to a spouse.

Trusts may also be an effective means of caring for one spouse or loved one with the income created by a grantor’s assets, while ensuring the principal (also known as the corpus or body of the trust) is protected and preserved and passes on to another set of beneficiaries upon the death of a second spouse. Generation-skipping or grandparents’ trusts work similarly—income is paid out to one set of beneficiaries in the next generation, usually the grantor’s children, while the principal passes to the grandchildren when the grantor’s children die.

In a simple trust, all of the trust’s income is paid out to beneficiaries annually, while in a complex trust, some of the income is added to the principal.

Trusts enable grantors to direct trustees to “sprinkle” income or principal between beneficiaries. Maloney warned that any trust that sprinkles income should include a guidance clause indicating a grantor’s desires, especially if the care of one beneficiary takes priority in their mind—otherwise, the allocation of income or principal to a group of people would spread equally among them.

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