19 August 2017

Dear Trustee: Here's What I Meant

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The looming threat of a sharp cut in the gift- and estate-tax exemption spurred many wealthy families to set up trusts in a hurry in late 2012.

Now some families are doubling back to provide trustees with more detail about how they want their money to be used to benefit heirs.

So-called letters of wishes have long been common in the world of trusts and estates. The letters, which aren't binding, typically reflect the priorities parents and grandparents want trustees to take into account when doling out funds, such as paying for education up to a certain level.

But the letters have grown in importance in the wake of the 2012 scramble, experts say.

At the time, the $5.1 million gift-tax exemption for individuals was scheduled to expire at year-end and drop to $1 million starting in 2013. In addition, the top tax rate was set to rise to 55% from 35%.

Wealthy families feared that if they didn't quickly arrange to shelter assets in trusts, they could face steep tax bills down the road. Assets placed in certain kinds of trusts aren't included in a taxpayer's estate.

Congress finally acted on Jan. 1, 2013, making the higher exemption permanent as part of a deal to avert the fiscal cliff, while setting the top rate at 40%. (The current exemption is $5.3 million for individuals.)

By the time Congress acted, however, many trusts had been put in place using cookie-cutter documents that could be executed quickly.

Trusts created at the end of 2012 had many similarities, says Joanne Johnson, managing director of J.P. Morgan Private Bank's wealth-advisory group. For example, they tended to be broadly worded and give trustees great latitude, she says.

"Now people have an opportunity to step back and think about it," she says.

Click here for the full article in the Wall Street Journal.

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