Help preserve assets and provide for loved ones with trust

Published 12:00 am Sunday, December 9, 2007

As the year draws to a close, many people take time to reflect on their financial circumstances and to plan ahead, making provisions for their future needs and those of their loved ones. As part of your year-end planning exercise, take a moment to consider what would happen to your assets and surviving family if you were no longer able to care for them. Then consider the potential benefits of setting up a trust. Trusts are an effective means of helping protect important assets, providing for beneficiaries and managing taxes. And, contrary to popular belief, trusts are not just for the wealthy.

A qualified attorney can help you set up a trust fairly easily that can be used for any number of practical purposes, such as:

4 Controlling assets and providing security for beneficiaries.

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4Providing for beneficiaries who are minors or who require expert assistance managing money.

4Avoiding estate or income taxes.

4Providing expert management of estates.

4Avoiding probate expenses.

4Maintaining privacy.

4Protecting real estate holdings or a business.

Trust Definitions — A Quick Primer

A trust is a legal arrangement in which you, the owner of the estate and the trust’s grantor, transfer the legal title of that estate to somebody else — the trustee — for the purposes of benefiting one or more third parties — the beneficiaries. The trustee, who may be a person or corporation, is given title to the property in accordance with the terms of the trust agreement.

There are two general categories of trusts: revocable and irrevocable. Revocable trusts can be changed or “revoked.” Irrevocable trusts cannot be changed once they are set up. Most revocable trusts become irrevocable at the death or disability of the grantor. The assets you place into an irrevocable trust are permanently removed from your estate. Income and capital gains taxes on assets in the trust are paid by the trust. Upon your death, the assets in the trust are not considered part of your estate and are therefore not subject to estate taxes.

A trust for every purpose

There are many different types of trusts — each serving specific needs and involving different tax and legal considerations. While a thorough discussion of the many different types of trusts is beyond the scope of this article, following is a brief review of a few widely used trusts.

Living trust

A living trust allows you to be both the trustee and the beneficiary of a trust while you’re alive. You maintain control of the assets and receive all income and benefits. Upon your death, a designated successor trustee manages and/or distributes the remaining assets according to the terms set in the trust, avoiding the probate process. Living trusts are also an ideal way to provide for management of your financial affairs in the event of incapacity. You, not the courts or an improperly motivated family member, choose who will manage your finances.

Credit shelter trust

Married couples enjoy many protections with regard to estate planning. For instance, under the unlimited marital deduction, husbands and wives do not have to pay federal estate tax on assets transferred to each other. This benefit works well until the death of the surviving spouse, at which point nonspousal beneficiaries (typically children) may face a significant federal estate tax bill on any amount in excess of the current estate tax exclusion ($2 million through 2008).

To avoid this problem, couples should include a credit shelter trust in their estate planning documents. With a credit shelter trust, you divide your estate into two parts. One part is left to your spouse, and the other is placed in a trust. Any amounts left to your spouse are tax free due to the unlimited marital deduction, while those in the trust — up to $2 million — are sheltered by the estate tax exemption.

When your spouse dies, the trust assets will pass to your children or whomever else you’ve named as beneficiaries. The trust assets won’t be taxed as part of your spouse’s estate. The assets that passed to your spouse outright will go to whomever your spouse has chosen. These assets will be included in your spouse’s estate for tax purposes, but your spouse’s own exemption will offset some or all of the tax due. Using this planning technique, a couple could currently pass up to $4 million to their children or other beneficiaries estate tax free.

Irrevocable life insurance trust

This type of trust is often used as an estate tax funding mechanism. Under this arrangement, you make gifts to an irrevocable trust, which in turn uses those gifts to purchase a life insurance policy on you. Upon your death, the policy’s death benefit proceeds are payable to the trust, which in turn provides tax-free cash to help beneficiaries meet estate tax obligations.

Qualified personal residence trust

A QPRT allows you to remove your residence from your estate at a discount. Under this arrangement, you get to use the home for a predetermined number of years, after which time ownership is transferred to the trust or beneficiaries. Any gift tax you might incur from giving away the property is discounted because you still have rights to the house during the term of years spelled out in the trust. The potential drawback is that if you die before the term of the trust ends, the home is considered part of your estate.

Charitable Trusts

To help benefit your favorite charity while serving your own trust purposes, you might consider a charitable lead trust or charitable remainder trust. CRTs and CLTs are often described as mirror images of each other: CRTs provide an income stream payable to the donor, a family member or other heir for a designated period of time, after which the remaining principal goes to charity. CLTs, conversely, pay the charity a stream of income for a period of years, after which the remainder is paid out to designated beneficiaries, typically family members.

Perhaps one of the biggest benefits of trusts is that they allow beneficiaries to enjoy property ownership while minimizing the tax exposure to those involved. Keep in mind that trusts are legal documents — an estate planning attorney can help explain the complexities of specific trust arrangements.

William McDonough is associated with Linsco/Private Ledger. He works at McDonough Investments Group.