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Federal estate taxes and the benefits of having a trust

Someone who is making estate plans in Michigan may believe that a trust is his or her best option to avoid costly estate taxes. This is not necessarily the case, but there are a number of important and valid reasons why a trust may still be the most effective way to ensure that his or her estate is managed the way it should be.

The Motley Fool explains some of the intricacies of the federal estate tax code. Under the federal tax code, there are twelve tax brackets. Estate taxes within these brackets range from 18 percent to 40 percent. While these brackets are not exactly undone by the 2017 federal estate tax exemption of $5.49 million, for the mo, t part they are rendered a moot point. The federal estate tax exemption functions as a unified credit for estates that are up to $5.49 million in value. Without the exemption, the tax bracket for a person with an estate of $5.49 million would require payment of $345,800 on the first $1 million and 40 percent of the other 4.49 million ($1,796,000.00). Over $2 million would be taken by federal taxes before any money reached her heirs. With the credit, her estate pays nothing for the first $5.49 million and then pays the 40 percent of the highest tax bracket for any amount over $5.49 million.

As described by CNBC, the federal estate exemption means that trusts formed solely to get around federal estate taxes are unnecessary for estates that are worth less than $5.49 million. Note, however, that state estate taxes may still make a trust the most viable financial option. There are many reasons aside from taxes when a trust can bring peace of mind. Trusts allow more control than the straight distribution of assets that occurs in a will. Trusts can meter out the financial assets of an estate to help heirs avoid the pitfalls of coming into too much money all at once. Trusts can allow funds to be distributed to charity along specific terms. Trusts can also designate land or property to be shared between beneficiaries over time. Trusts can be an effective way for people to maintain peace of mind about what will happen to their family after they are gone.




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