What's the difference between an inheritance and a trust?

If you were one of the many people who created an asset trust a couple of years ago to help your descendants save on estate taxes, you probably wish you hadn't.

While the estate tax rules have been one of Congress' favorite footballs to kick around in the last few decades — exemption levels and tax rates have changed some 20 times since 1976 — the so-called fiscal cliff deal struck in early 2013 seems to have settled the issue.

The estate and gift-tax elements of that deal — the American Taxpayer Relief Act — essentially extended the favorable rules previously in place. The $5 million exemption, adjusted for inflation, was made permanent, as were the rules on portability of the exemption for married couples (i.e. $10 million per couple). The tax rate on estates over that threshold, now $5.45 million per person, was bumped up to 40 percent.

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"They did use the word 'permanent,' but nothing is permanent when you're dealing with Congress," said David Mendels, a certified financial planner and director of planning at Creative Financial Concepts.

It was good news for most affluent people. The estate tax now only affects about 0.2 percent of the population, or roughly 600,000 Americans. However, for those who spent a lot of money setting up trusts to avoid the potential tax hit, the deal may have been bittersweet.

"The big driver of demand [for trusts] over the last 20 years has been the estate-tax issue and minimizing the consequences of it," Mendels said. "That motivation is gone, and many of those trusts are not productive for people anymore."

The bigger considerations for most people are now income and capital gains taxes. On those fronts, trusts are decidedly inefficient. For one thing, those who receive assets through trusts versus an inheritance at death don't get a step up in cost basis on assets like stocks and real estate.

With combined federal and states capital gains tax now approaching 30 percent for some individuals, that can be a huge factor. Ordinary income from trusts is also taxed at the highest marginal tax rate — 39.6 percent — over a $12,300 threshold.

If a married couple has less than $11 million in assets between them, the costs and complications of establishing and managing trusts will likely far outweigh any potential tax benefits.

"There are very real costs [to trusts] from an administrative and tax perspective," said Mendels. "If a couple has under $11 million, there is no good reason to set up a trust solely for tax purposes."

There are other good reasons to create trusts, however. They remain powerful vehicles for people to manage assets for themselves, their families and other beneficiaries both during their lifetime and after they die. They can transfer assets to children in a thoughtful, controlled manner and can generally give people more control over who and how assets are made available to others. For wealthy parents the potential ill effects of wealth on their children can be very real concerns, and trusts can help them control the process more effectively.

"Trusts existed long before estate and income taxes became a concern," said Suzanne Shier, chief wealth planning and tax strategist at Northern Trust. "They are a very useful means to provide for the administration of property and wealth for family and philanthropy." They are also usually just one part of an estate plan, said Shier, which also includes the assignment of power of attorney and the creation of a will.

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Legal melees regularly follow the deaths of wealthy people, such as singer/songwriter Prince, who don't draft a will. "It can be a horror show without it — particularly if there are minor children," said Mendels of Creative Financial Concepts. "If you really don't care what happens, then OK.

"But you're creating a mess for people and helping lawyers make a lot of money."

When it comes to creating trusts, estate planners have some simple advice. Before you start considering all the bells and whistles and bewildering details of other trust vehicles, figure out what you want to accomplish first:

• Is your main concern to provide for a spouse, children, grandchildren or charitable organizations?
• What kinds of assets do you own?
• Is protection from creditors and litigants a major concern?
• Do you want the trust created within your will (testamentary), to take affect when you die, or as a separate agreement that can be funded and executed during your lifetime ("inter vivos")?

"Figure out your goals first, then start focusing on what types of trusts can help you meet those goals," said Shier at Northern Trust.

Use an advisor, mind the trustees

Most people considering asset trusts probably have a financial advisor. Advisors can be invaluable in determining what your financial objectives are and helping map out the financial consequences of different alternatives. They can also likely refer you to an estate attorney.

Include your spouse in the discussion. "You will eventually need a lawyer to prepare the estate documents, but if you have a financial advisor you can start the conversation with them," said Shier.

The trustee, or manager of the trust and its elements bears a huge responsibility. Depending on the size of the trust, it can be a big job, too.

Many individuals who create trusts choose to serve as trustee themselves. However, it's crucial to have a succession trustee that you're comfortable with to take over the job if you die or are incapacitated.