A Primer for the Businessperson: In Trusts We Trust

November 1, 2008
New Jersey Business

Posted with permission from New Jersey Business magazine.

Since the average net worth of New Jersey Business magazine’s readers is $1.2 million, it stands that they either already know – or might want to know – something about trust law. While one need not be excessively affluent to establish a trust, it is true they aren’t necessary in every case. When appropriate, they can offer an array of benefits, including, for example: accomplishing substantial estate tax savings; allowing protection from creditors; and permitting the person who sets up the trust to control which persons are going to ultimately receive the assets, and when. Among many other uses, trusts can also protect beneficiaries from themselves. For instance, they can prevent an inexperienced 21-year-old from receiving a lump sum of $500,000.

What Is a Trust?

While trust law is extraordinarily complex, it essentially involves giving money or other property to a trustee, who in turn holds property for a beneficiary or beneficiaries (people who will receive the property). Different types of trusts exist, and they can be created either when a person is alive, or established when a person passes away. Also, trusts may have provisions for change, or, on the other hand, they may be irrevocable.

One trust use is for ameliorating estate tax burdens. The federal estate tax exemption is currently $2 million (it changes to $3.5 million in January), and in New Jersey the state tax exemption is $675,000. A hypothetical married couple with children collectively might have $3 million in assets ($1.5 million owned by the wife and $1.5 million by the husband). Then, the wife dies, leaving her $1.5 million to her husband. A short time later, he dies, with $3 million in total assets. Absent a trust, the first $2 million is, of course, exempt from federal taxes, but the next $1 million would be subject to substantial taxation.

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