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Tax changes create estate planning challenges

Massachusetts taxpayers know that the federal government raised tax rates for personal and investment incomes for wealthy individuals effective for 2013 tax returns. The tax changes were in part implemented to fund the President's health care plan. While this hike in income tax rates will only affect individuals making more than $400,000, the new marginal rate will affect trusts making more than $11,950 a year. This change in tax law may create challenges for estate planners.

Estate planning professionals are taking a close look at how this change affects trustees and beneficiaries of trusts, and most of them are focused on finding strategies to reduce taxes. A trust allows assets to be transferred to someone's heirs without paying estate taxes, and they often allow for a trustee to manage the assets for the beneficiary. This can be very useful in the case of passing on wealth to children. As different trusts have different purposes, a trust should be carefully set up for maximum benefit.

While there are many benefits associated with the use of trusts for estate tax planning purposes, they are usually not designed to be shelters from income tax. Many trusts were created long before the new tax laws went into effect. These recent changes have created a challenge for trustees, and they may result in a beneficiary receiving smaller distributions after the higher taxes are imposed on the trust.

When an individual in Massachusetts is planning his or her estate, one goal may be to minimize the estate tax liability by using trusts to pass assets to heirs. An estate planning lawyer may take into account the new tax laws and their effect on trusts when helping an individual create an estate plan that will pass one's property to the heirs according to the client's desires.

Source: CNBC, "Estate planners shift gears in new tax environment", Andrew Osterland, March 21, 2014

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