Trusts Are Alive and Well and Living in Estate Plans

May 20, 2011

Trusts Are Alive and Well and Living in Estate Plans

Versatility and Tax Benefits Are Just the Beginning

A trust is a useful tool in which the creator of the trust uses a trustee to distribute the money to the appropriate beneficiaries at the appropriate times. What's nice about a trust is that the trustee manages everything in the trust, but is not necessarily a beneficiary. This makes trusts an excellent and safe way to provide for beneficiaries, as whoever manages the trust does so for the benefit of someone else, and can only give the money at certain times or for certain reasons designated in the trust.

A Variety of Trusts for a Variety of Purposes

Estates with a high net worth will sometimes make a trust for tax purposes. In one type of trust, the creator of the trust (called the "grantor") makes an irrevocable trust, which -- as its name implies -- cannot be changed. Since the property or money has already been given away, the trust assets are excluded from the grantor's taxable estate, meaning that they are not subject to estate tax at the death of the grantor. Irrevocable trusts almost always are accomplished by having the grantor make a gift to the trustee of the irrevocable trust. A gift tax return is required to be filed, but unless the grantor has already made substantial gifts previously no gift tax is due. Instead the grantor applies some of his or her lifetime gift credit to the gift. Irrevocable trusts are prepared with the goal of removing the appreciation of the trust assets from the grantor's taxable estate, i.e., the increase in the value of the trust assets that occurs after the gift is made to the trust will pass to the grantor's beneficiaries without ever being subject to estate or gift tax.

A revocable trust, on the other hand, can be changed at any time by the grantor, which is why the IRS treats it as taxable. Revocable trusts serve as will substitutes and are often done with the goal of avoiding the probate process. They also provide a convenient way for a grantor's financial assets to be managed in the event of the grantor's disability. At any time the grantor of the trust can change his or her mind about when and to whom he or she chooses to give the money in the trusts. While revocable trusts provide many benefits, assets in the revocable trust are not protected from creditors because the grantor can access the assets in the trust at any time. Revocable trusts also do not necessarily reduce estate taxes. A revocable trust may, or may not, contain a plan to minimize estate tax.

Life Insurance Trusts

In an attempt to provide for their children, many parents purchase life insurance policies. However, depending on the size of the estate and the amount of the death benefit on the policies, an estate tax problem could exist for the family.

The way the federal estate tax is currently structured, a person is treated as the owner of an insurance policy on his or her own life, according to Smart Money Magazine. This means that upon that person's death, the benefits of the policy are treated as part of the taxable estate. A trust is often recommended to avoid taking this tax hit.

In an irrevocable life insurance trust, the trust owns the policy. Upon the death of the insured, the benefits of the policy will pass to the beneficiaries without incurring any federal estate tax.

It is best for the life insurance trust to be created before the policy is acquired. Existing life insurance policies can be transferred to a life insurance trust, however, if the insured dies within three years of the transfer of the policy, the death benefits are still included in the insured's taxable estate.

Working With an Attorney

Due to a myriad of potential tax consequences, most trusts are complex legal documents. Trusts not created by experienced attorneys can often have mistakes. Without help, for example, the creator of the trust may make a perfectly valid trust, then fail to put any assets into it, rendering it useless. If you think a trust may be a good idea for you, find an estate planning attorney to help guide you through the process.

Article provided by Merrill, Cruttenden & Collinson, PA
Visit us at http://www.merrillaw.com