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How do new portability rules affect trusts, estate planning?

From time to time, changes to Michigan or federal laws affect the way in which people approach estate planning. Failure to monitor these changes and update estate plans could have unintended consequences, particular in terms of taxation.

The most recent changes to federal estate taxes came with the American Taxpayer Relief Act of 2012. Under this law, spousal exemption portability was put into law permanently. When people pass away, they can distribute assets to their spouses without tax liability and can distribute up to $5.34 million (in 2014) to others without taxation. Any unused portion of the $5.34 million exemption is passed to the deceased person's spouse under the portability provision.

Being able to exempt up to $10.68 million worth of assets from taxation, by combining both spouse's exemptions, may relieve tax concerns for many people. Traditionally, people have used bypass trusts to avoid subjecting assets to estate taxes. Some people, as a result, might believe that the new portability law means that a trust isn't necessary.

Although trusts are typically associated with tax benefits, the reality is that they can serve other purposes. In fact, a report from Business Management Daily, points out that trusts can protect a person's assets in other ways. For example, a trust can be created to prevent assets from being distributed to unintended beneficiaries. Trusts can be drafted to administer assets to loved ones in clear, specific ways to meet the desires of the person creating an estate plan.

As we have previously mentioned on this blog, every person has different needs and assets. Estate plans should cater to individual differences. For some people, creating a trust may be the best way to protect and pass on assets.

Source: Business Management Daily, "Forget the bypass trust? Not so fast," Dec. 30, 2013

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