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Trust decisions get tougher with tax changes

New Jersey residents who want to set up trusts for their descendants face a myriad of new laws and regulations that may affect how they plan for trust dispositions. Estate planning is not becoming a simpler process; rather, with the changes brought about by the so-called "fiscal cliff" deal as well as the new Medicare tax on passive income, it is becoming more complex.

Many strategies that worked in the past, such as investing in IRAs and irrevocable trusts to shelter income for future generations, may no longer be the best approach. Today, a "spray" trust or a "decanting" option, designed to assist the heirs or the trust's creator respectively, may be a better approach than sealing off assets.

Furthermore, tax considerations have shifted from focusing on the trust itself to the grantees. If the heirs have lower levels of income, they may demand payments from a trust even if it means the trust itself may face significant tax consequences. The creator of the trust may want to take this into account when setting up the conditions under which a beneficiary can demand payment. By limiting withdrawal options, the trustee may be able to steer the trust on a course that will minimize tax implications for everyone.

Individuals who plan to invest some or all of their resources in a trust to protect money for the future may wish to consult an estate planning attorney before making any important decisions. An attorney may be able to work with experts such as financial planners and accountants to discover the best possible way to protect income and still benefit the people the trustee would like to help.

Source: Financial Planning, "Time for a new estate planning strategy?," Martin Shenkman, April 1, 2013

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