Estate Planning Trusts

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Estate Planning Trusts

Don't Get a Revocable Living Trust for the Wrong Reason
A revocable living trust can be a useful tool to help you reduce estate settlement costs and to retain control over your assets while you are living. However, the benefits of an revocable living trust will vary from person to person. In other words, it is not for everyone.

An revocable living trust allows you to transfer your property to a trustee with instructions to hold the assets as specified within the trust for the benefit of the beneficiaries. The trust agreement often covers three important time periods.

The first part covers the time that you are alive and competent. In most cases, you would be the sole beneficiary and sole trustee. You'd have complete control over the property, including the authority to remove all of the trust's assets and the ability to revoke the trust at any time, for any reason.

Part two stipulates that if you become incapacitated, a successor trustee that you have named in the trust will take over to manage the assets for you. You will, however, remain the sole beneficiary. This section will eliminate the need for your family to go to court to seek guardianship over your finances in the event you are unable to manage those funds on your own.

Finally, the third part directs the disposition of the trust's assets after you die.

A revocable living trust, in itself, will not completely eliminate estate taxes for taxpayers with estates in excess of $2 million ($4 million if married). Yet it can help you to reduce these taxes by allowing you to make the most of estate tax exclusions, generation-skipping tax exemptions and marital deductions. Of course, these tax-savings techniques are also available through a well-designed will.

Assets in a revocable living trust also avoid probate, thereby reducing transfer costs for your heirs. An revocable living trust can also keep your affairs private since they are not a matter of public record. As probate costs can often reduce an estate by as much as 4-10%, significant costs can sometimes be saved using an revocable living trust. However, if the trust is unfunded, your assets will still go through probate.

There are also other ways to avoid probate. Joint ownership property can avoid probate as well as any accounts where you have named a beneficiary, such as IRAs, life insurance policies, and annuities.

As previously mentioned, a revocable living trust will not help you save on probate expenses if the trust is not funded. Bank accounts and funds held with your brokerage firm must be transferred by signing forms at your bank and by providing them with a copy of the trust agreement. With real estate, you will often have to file new deeds with your municipality.

Revocable living trusts have helped many seniors and their families better manage their finances but not everyone needs it. So before you spend the money, make sure you know what you hope to accomplish.

A New Type of Trust May be Able to Solve Many Estate Planning Problems
Many wealthy Americans today are worried about what will happen to their estates after they are gone. Although many different types of trusts have been designed to help alleviate this problem, a new type of trust, called the “inheritor’s trust” has a level of flexibility that is unmatched by other estate planning vehicles. This type of trust is a dynastic trust, similar to many other types of dynasty trusts, except that this trust is a “stand alone” trust that allows for changes in investment strategies, as long as the beneficiary is willing to discuss the situation with his or her grantors.

This type of trust can provide substantial benefits for those seeking long-term, multigenerational planning, such as the type designed to avoid the generation-skipping transfer tax. It can also protect against divorce, creditors and estate taxes. Any parent that is currently gifting assets to their children on any kind of regular basis should seriously consider establishing one of these inheritor's trusts. The key difference between this type of trust and other trusts is that the beneficiaries must be willing to talk openly with their grantors regarding how they want the money invested or handled.

In order to establish an inheritor’s trust, an empty, irrevocable dynasty trust must be established first. The inheritor is more often than not the trustee, and must usually choose a close friend or confidant to be the distribution trustee. This trustee has absolute control over what kind of distributions are made from income and principal. However, this transference to a third-party trustee is exactly what makes the assets of the trust so secure from creditors. Beneficiaries have absolutely no legal right to force any kind of distribution from the trust, which renders creditors unable to force any type of distribution from the trust as well. It is important to select the correct state to create the trust in, as the validity of these trusts will vary according to state law.

If you are worried about your estate tax situation or whether your beneficiaries will be able to do what they want with your assets once you’re gone, contact us. We can review your situation and help you to determine whether you would benefit from an inheritor trust or another estate planning technique. Of course, you will obtain or we can refer you to legal counsel if needed as we do not provide legal advice. Also note that hypothetical discussion above does not take into account any fees or tax consequences associated with the establishment of a this type of trust.

Use a QTIP Trust to Give Your House to Your 'First Marriage' Children But After Your Second Spouse Dies
Divorce is prevalent in society. Older couples married for the second time often have their own children from a first marriage. Each wants to bequest things to their own children. Each in the couple may have his (her) own assets but one main asset might be owned by one of them. More often than not, that’s the house they’re living in. How can that house owner assure that his house goes to his children of a previous marriage while making sure his present spouse will always have their house to live in? In a moment, we'll see that the QTIP trust is the answer.

With the automatic way probate laws work, the spouse who dies earlier may lose all control of where his assets end up. Present spouses may not be on good terms with their spouse’s children. So, spousal promises to carry out wishes may wear thin as the years pass beyond a spouse’s death.

There is one device, though, by which a spouse can assure that his house will pass to his own children but after his present spouse dies. And that’s called the qualified terminal interest property trust (QTIP). He simply creates the QTIP trust making his own children the ultimate beneficiaries of it. His spouse benefits while she lives but her interest in it is terminated at her death.

The house-owning spouse funds the QTIP trust with assets that qualify for the unlimited marital deduction. This would include the house as well as anything else he chooses. Any income that is generated in the trust must be paid to his surviving spouse – and only to her or else the marital deduction (i.e. what is put into the QTIP trust) would be disallowed. Use of the house would obviously be the surviving spouse’s right in this regard too.

Finally at the surviving spouse’s death, the assets in the trust (i.e. the house) are considered part of her estate for purposes of calculating any estate tax that may be due upon her death. Nevertheless, all QTIP trust assets are paid to his children.

Because the QTIP trust assets are part of the surviving spouse’s estate, they get a step-up tax basis. This means their tax basis immediately jumps from what it was previously to their fair market value on the surviving spouse’s date of death. If the children decided to sell the house upon receipt of it, they’d have no capital gains tax on it because the tax basis would then be equal to it sales price.

Lastly, since the QTIP is a trust, it bypasses probate at the surviving spouse death.

Achieve a Second Step-up in Cost Basis With a Credit Shelter Trust
For many affluent investors, avoiding income and estate taxes is a major concern. Large estates that are left unprotected can face estate tax bills of up to 60% of their value. Fortunately, there are many things that can be done to reduce--or even eliminate--estate tax liability that involve establishing trusts and purchasing life insurance.

Married couples who have assets that have substantially appreciated over time can save big dollars on their estate tax bills by establishing a credit shelter trust. This type of trust allows each spouse to take advantage of their unified credit amount ($2,000,000 through 2008) by transferring their share of assets (up to the limit) into the trust when they die. These appreciated assets will receive a “step-up” in basis upon the death of the first spouse; which means that none of the appreciation of the assets up to the time that they are placed in the trust will be taxed. Then the surviving spouse will immediately (before the assets appreciate any further) sell a portion of the assets in the trust, and use the proceeds to buy a life insurance policy on him or herself with the trust as the beneficiary.

Therefore, when the surviving spouse passes away, the trust will receive the entire death benefit, with no tax liability. For all practical purposes, the assets of the trust that were received from the first spouse to die grew to the amount of the life insurance death benefit of the surviving spouse upon his or her death.

As an example, consider Joe and Betty Smith, a hypothetical wealthy couple with about $12 million in assets. Joe is the majority shareholder in his family business, and will most likely be outlived by his wife. Joe and Betty set up a credit shelter trust. Joe eventually dies and transfers $2 million of his company stock into the trust. Betty uses $250,000 of it to purchase a $2 million single-premium life insurance policy on herself. When she dies, the death benefit will join Joe’s stock in the trust and pass to their heirs tax-free. It can be said that Joe’s $1.75 million in remaining assets grew by another $2 million through the purchase of life insurance.

Note that this hypothetical example does not take into account fees or tax consequences associated with the establishment of a credit shelter trust.

Protect Your Disabled Heirs With Special Needs and Payback Trusts
If you or a loved one has a child or other heir that is mentally or physically disabled, then you may have major concerns about how to provide for that person once you are gone. Statistically, the odds of becoming disabled are much greater than the chance of an untimely death. Furthermore, the financial impact of disability can be far more devastating than death, as someone who is incapacitated will continue to require ongoing care for the duration of the disability.

One key component to planning for this unpleasant contingency could be drafting a special needs trust. This type of trust is similar to most other trusts in many respects, and is almost always used in conjunction with Supplemental Social Security income and Medicaid. Therefore, one of the main functions of the trust is to ensure that the funds it pays out do not coincide with benefits that are paid from the public sector. The assets of this trust also cannot exceed a specified amount, or the trust becomes defective.

Generally, special needs trusts can be funded with the same types of assets as most other trusts, such as cash, stocks and bonds, mutual funds, personal property, real estate and even life insurance. Cash value life insurance is in fact often used to fund these trusts, as many donors are not able to adequately provide financial support by any other means once they are gone. Annuities are also often used as an alternative investment if the grantor/donor is uninsurable.

Another type of irrevocable trust, called a “payback” trust, offers the ability to bypass the standard Medicaid rules; excluding benefits for those who had assets transferred to them any time in the 60 months before application. There is an exception written into the laws stating that any disabled person under age 65 can remain eligible for Medicaid as long as they transfer their assets to this type of trust. However, the law also mandates that upon the death of the disabled beneficiary, any remaining assets in the trust revert back to the state. This aspect of the trust differs from the special needs trust, which may have a remainder beneficiary.

If You're Married, a Bypass Trust Can Save a Lot on Eventual Estate Taxes

If you have been fortunate enough to have acquired a lot of wealth, you will want to preserve it for your spouse and children to enjoy. But at your death, the federal government imposes an estate tax on the wealth your own. It is a progressive tax that starts at 41% and rises to 45% for estate transfers over $2 million. In 2008, the first $2M of your estate is excluded from estate tax. But you can see the tax would be quite significant for large (over $4M) estates – and all effort should be made to avoid paying it.

One exception to this transfer of wealth tax by death is called the ‘marital deduction’. Any amount you leave to your spouse at your death is deductible from your taxable estate. So, you can leave all your wealth to your spouse and no estate tax is due.

This may sound like a good option, but when your spouse eventually dies, the estate tax will kick in on all her (or his) wealth. She’ll get to use her $2M exclusion, but by then the wealth may have grown considerably and a good chunk--approaching 25%--of it will not go to your children but to the government.

If you are married you can significantly reduce (or avoid altogether--depending on the size of your estate) the estate tax on your wealth by using a Bypass Trust. It works by making use of your $2M exclusion that you would forgo by giving everything to your spouse as above. You simply arrange to transfer $2M (i.e. your exclusion amount) of your wealth to the Bypass Trust (BT), and leave the rest to your spouse.

That way when your spouse dies, fully $4M (your exclusion amount at your death and her--or his--exclusion amount at her death) will have been excluded from your wealth rather than just $2M if you had transferred everything to her at your death.

But the benefits can be better than just this. First, in addition to the children being the ultimate beneficiaries of the Bypass Trust, you can have its income used for your spouse during her (or his) remaining lifetime, so the money is not all lost to your spouse. Second, you should put those assets that will appreciate most in the Bypass Trust so the increase of this portion of your wealth will not be subjected to Estate tax as they would if left with your spouse.

The figure shows how a Husband (H) and Wife (W) of a $5M estate can use the Bypass Trust (BT) to transfer money eventually to the Children (C). In the figure the $2M transferred to the BT may grow to $4M while the W’s $3M may grow to $4M too. The estate tax paid at W’s death would be only on her estate for the $2M (= $4M - $2M exclusion). If the original $5M had been transferred all to W, at her death her estate would grown to $8M. In that case $6M (=$8M - $2M exclusion) would be subject to estate tax!

Of course, you could give your children a share of your wealth while you’re living or at your death–to use up your exclusion amount. But use of the Bypass Trust provides income protection for your spouse as well as preservation attributes for your children.

Give us a call or fill out the reply coupon so we can help you decide if a Bypass Trust is an appropriate way for you to potentially maximize transfer of your wealth.

Give a Crummey Gift and Contribute to Your Legacy at the Same Time
W e can use trusts to contribute funds to our beneficiaries after we die. But contributing assets to trusts is a gift to its beneficiaries for their future use. Unfortunately, the IRA says that only gifts of present value qualify for the annual gift tax exclusion (currently $12,000 per donee per year). Here is a way to get the exclusion even when making a gift that will not currently provide its benefit.

Clifford Crummey wanted to build a trust fund for his sons and was able to get the yearly gift tax exclusion. He won that right in court because he gave his sons an opportunity each year to take their share of what he contributed to the fund (i.e. the sons had a limited window of time to take the cash). This way the gift was indeed of present value. Whether they actually took the gift then– r let it sit in the trust - was deemed immaterial.

So as long as the beneficiary has a right–referred to as a Crummey power–to demand his share of the yearly gift to a trust, the donor of the fund can claim the annual gift tax exclusion. This Crummey power has since been expanded to beneficiaries of many other types of trusts as well.

Operationally, a donor makes a contribution to an irrevocable trust. He notifies the beneficiary that he or she can withdraw their share of the funds for a specific window of time–but not less than 30 days. The donor lets the beneficiary know that this is the Crummey power provision so that the beneficiary generally declines to withdraw the gift when given the opportunity. This provision enables a person’s gift to be eligible for the gift-tax exclusion. The beneficiary generally complies with this arrangement to waive their Crummey power and leave the money in the trust.

The Crummey demand power is an important tool in planning gift taxes. It permits all transfers to a trust to qualify for the $12,000 gift tax exclusion (in 2008) even if the trust benefits are intended for the future.

Estate Planning For Uncertain Times: A Closer Look at Survivor Access Insurance Trusts
There is a good chance that you have heard that federal estate taxes are scheduled to disappear in 2010, yet return in 2011. Many people, however, expect major changes before then. What these changes will be though is anyone's guess. Therefore, some investors have taken the "wait and see attitude" when it comes to estate planning, since they think the tax will go away. However, with the looming federal deficit, Congress could be hard-pressed to repeal the federal estate tax.

Investors with estates in excess of $2 million (the current estate exemption in 2008), who realize their estates could be hit with estate taxes, have sometimes used irrevocable life insurance trusts (ILITs) to provide the needed funds to pay these taxes. These trusts can also be used to convert funds that are otherwise taxable into a death benefit for younger family that comes free of federal income and estate taxes. But some couples might shy away from an ILIT because of the inability to get at money that they may need for other purposes. With this in mind, there is another type of trust that could provide what those couples want: liquidity and flexibility.

A survivor access trust allows a beneficiary tax-free access to the cash value of life insurance within the trust. The amount that can be withdrawn is described as enough to preserve the lifestyle that the beneficiary is accustomed to living. The grantor spouse pays the premiums and cannot touch the cash value. This keeps the death benefits out of his or her taxable estate. But by association with the beneficiary spouse, the grantor can arguably benefit from the distributions to the spouse. Of course, the death benefit of the life policy could be reduced by any amounts withdrawn by the beneficiary.

To remove the proceeds from the beneficiary's estate, a trustee must be used. This can be an institution, such as a bank, or a family member, other than the grantor or his or her spouse. Also, the beneficiary cannot contribute to the trust.

No one knows whether or not the estate tax will be permanently repealed in 2011. Therefore, it is important to have an estate plan that is flexible. For a free illustration on how life insurance could possibly provide for your survivors and reduce estate taxes, please return the enclosed coupon.

Note: Life insurance is subject to medical underwriting, and death benefits will vary based among other things upon your age, health, and premiums. Fees and other expenses will apply with the purchase of life insurance, and surrender charges may be applicable on money withdrawn or benefits reduced after the policy purchase date. Insurance benefits and premiums do vary from company to company. Insurance guarantees are subject to the claims-paying ability of the issuing company.

Would Your Survivors Spend It All--the Spendthrift Trust
Like most seniors, you have worked hard to get where you are financially, and you want to make sure that your heirs receive everything that you plan to leave them. To accomplish this, you may have even established a trust to reduce transfer costs and possibly shelter taxes. But what will happen once your loved ones receive their inheritance?

Will they invest it wisely for the future, quickly spend it all, or will angry creditors line up at their door to get paid? An additional special clause within your trust may possibly assure that the assets that you pass to your beneficiaries will last as long as you had wished.

A spendthrift clause (or separate spendthrift trust) prevents trust beneficiaries from voluntarily or involuntarily transferring current or future rights in the trust. Without this, beneficiaries have unrestricted ability to use the assets, and thus their creditors can attack those funds. State laws determine the exact language and the degree of creditor protection spendthrift trusts offer. Nevertheless, the concept restricts the beneficiaries' access to the trust's property.

The trustee whom you select is usually given the discretion to distribute money as needed to the beneficiaries. This may be an ideal choice for a beneficiary who is financially irresponsible, and likes to spend, or you may want to provide for a loved one who has special physical or mental needs.



1 - A private foundation is a 501 (c) (3) organization (i.e., a charitable organization) that does not qualify under the tax code as a "public charity." Private foundations are subject to certain taxes that do not apply to public charities. The tax code limits the deductibility of gifts to private foundations in ways that do not apply to public charities.

2 - IRS publication 557 – outlines restrictions on private foundations.

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