Why Mass. Residents Might Consider Trusts

When people think about financial planning, they tend to focus on retirement planning, taxes, and investments. These are all critically important pieces of a holistic plan. But one often overlooked piece is the estate plan.

A buttoned-up estate plan helps during your lifetime, with documents such as powers of attorney and health care proxies, and after your death, with the distribution of assets according to your wishes. Most people have a will, but relying on a will alone may miss important opportunities.

In fact, many Massachusetts residents—especially married couples, those who own a home, those with children from multiple relationships, and those with over $2 million in assets—could benefit from a more robust plan that includes certain trust documents.

The three biggest reasons to consider forming a trust are:

• they allow assets to be distributed to your heirs outside of probate

• they can help effectively double the Massachusetts estate tax exemption for married couples, and

• they can be more flexible than relying on a will alone.

Let’s start by explaining what a trust is and how it works.

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A trust is a legal arrangement governed by a written document. Think of a trust as an imaginary box. You, the grantor, put money or property into this imaginary box. You choose a trustee to hold the key and manage the assets. You also get to choose who benefits from the trust. The person or people who benefit are called the beneficiaries of the trust. They receive the assets from the box either now or in the future based on what is written into the trust document.

A common misconception is that assets in a trust are inaccessible. While this may be true for some irrevocable trusts, many revocable trusts allow you to use and manage the assets freely during your life. As the grantor, you may also be the trustee during your lifetime.

So how do you benefit from a trust? Why add this level of complexity to your estate plan?

The first benefit of a trust is that you can be ultra-specific about how your assets are distributed in the future. You can set rules around a beneficiary’s age, timing of distributions, and what happens after a beneficiary passes. This can be especially useful for blended families or people with multiple marriages. For example, a trust might allow you to leave assets in trust to benefit your second husband, and for any remaining assets after he passes to go to your children.

The second compelling reason to use a trust is that trusts can help avoid probate—a sometimes lengthy legal process through which a court validates the will and legally appoints your personal representative (formerly called an executor) who will then settle your estate. Even the simplest of probates will add some legal expense and, in any case, will be a matter of public record. Assets held in trust, on the other hand, may be invested or distributed immediately per the terms of the trust document without the involvement of the courts.

A third reason for using a trust (specifically, a credit shelter trust), and perhaps the most impactful, is that married couples can effectively double the $2 million Massachusetts estate tax exemption, thereby shielding up to $4 million from estate taxes. At $2 million, the Massachusetts estate tax exemption is one of the strictest in the nation and is not portable between spouses.

Having “portability” means that a surviving spouse can take any unused portion of their deceased spouses’ estate tax exemption. In contrast to Massachusetts, the federal estate tax exemption (of about $14 million per person) is portable. This means, for example, that at the federal level, if a husband dies and leaves $5 million to his children, the “unused” $9 million of his exemption shifts to his surviving wife. She can now leave up to $23 million ($14 million plus $9 million) to her heirs without breaching the federal estate tax threshold.

Not only is the Massachusetts estate tax exemption much lower, but it also isn’t portable. So, if a husband leaves $2 million outright to his wife, and her estate ends up being $3 million when she dies, her estate is subject to estate tax on $1 million ($3 million minus the $2 million exemption). But if he leaves the $2 million in a trust, even one which is established to benefit the surviving spouse, her estate could be just $1 million—no Massachusetts estate tax due.

Most married couples in Massachusetts with more than $2 million in assets stand to benefit from trusts. For example, a married couple with $4 million in total assets could save more than $130,000 in estate taxes with proper trust planning. And remember, the value of your estate includes real estate which brings many homeowners closer, if not exceeding, the estate tax threshold.

While trusts may seem complex, they can be one of the most effective tools in a Massachusetts estate plan. If used wisely, they allow you to avoid probate, control how and when assets are distributed, and potentially save your heirs significant money in estate taxes.

If it’s been years since you reviewed your estate plan, or if you’ve never created one, now is a good time to consider discussing with a lawyer or financial planner whether trusts—or updating your estate plan—could benefit you.

This article originally appeared in The Berkshire Eagle.