When Congress settled on a new set of generous estate tax regulations that benefit wealthy taxpayers far more than older rules, some Texas residents are unsure of how best to take advantage of the available perks. The new rules allows one to exclude millions of dollars from their estate taxes, but many wealthy families have begun to question whether they wish to guarantee such large sums for their children.
Had Congress failed to agree on the new regulations, a taxpayer would have been able to shield only $1 million from estate taxes while paying 55 percent on any sums above that threshold. However, the new rules allow a couple to exclude up to $10.5 million and pay a rate of 40 percent. This allows wealthy individuals significantly more protection against the IRS.
However, some are concerned that taking advantage of the rules and bequeathing huge sums to their children could create a false sense of entitlement and destroy their motivation to work hard. According to surveys from Bank of America’s U.S. Trust, many people with over $3 million say their children are not ready to inherit their assets.
An increasingly popular way to address this problem is to keep an heir’s inheritance somewhat secret. “Silent” trusts allow families to put aside money for their children without informing them of their incoming wealth until they turn 30. These trusts became especially widespread in 2012, when a growing number of states made pushes to legalize them. About 13 states currently have laws that allow silent trusts, while 19 other states permit the trusts but do not have laws explicitly address them.
Some estate planners are concerned that the terms of silent trusts create problematic complications for trustees. Because trustees traditionally report directly to the beneficiaries of their trusts, silent trusts can make it hard for them to fulfill their duties. Similarly, some experts say that some children could be distraught and disturbed upon finding out that their families hid their fortunes from them.
Source: Wall Street Journal, “Can You Trust Your Kid With $5.25 Million?” Kelly Greene and Arden Dale, Jan. 18, 2013