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When it comes to protecting and transferring assets, trusts are among the most
valuable tools available to you. Within certain limits set by law, trusts allow
you remarkable flexibility in how you use and disburse assets while living and
after death. A trust can help you control your financial destiny by:
- Reducing taxes
- Providing for family, friends, and/or a favorite charity
- Keeping your personal financial matters out of the public eye
- Simplifying your life
At The Commerce Trust Company, we cannot create a trust for you—an attorney
must draw up the actual trust documents. But we have nearly nine decades of
experience in working with legal and tax advisors to craft these very personal
arrangements.
What's more, our professionally trained trust personnel have the experience
necessary, in administering trusts of all types. So, once you establish a
trust, we are more than qualified to execute its terms on your behalf. Our
trust administrators have the extensive knowledge of the estate and tax
planning issues that trusts may address, as well as the many ways a trust can
achieve your charitable-giving goals.
The information in these articles will help you better understand how a trust
might benefit you, as well as the persons and/or causes that matter most to
you.
Living Trusts: The Solution to Several Challenges
Using Living Trusts in Your Estate
Planning
Charitable Trusts: An Overview
Life Insurance Trusts
LIVING TRUSTS: THE SOLUTION TO SEVERAL CHALLENGES
How can you make someone else legally responsible for managing your assets, and
providing you income, while you're living? How do you efficiently transfer
assets to your family at death? How do you do so without the transfer becoming
public knowledge? And how can you ensure that the transferred assets will be
professionally managed after your death? For many individuals, the answer is a
living trust.
Unlike a will, which becomes a matter of public record after your death, a
living trust allows your asset transfers to remain completely private. What's
more, you can use the trust to ensure that the assets are and will continue to
be professionally managed—yet without losing control of them while you're still
alive.
Maintaining Control
As the name indicates, a living trust takes effect during the grantor's (trust
creator's) lifetime, unlike trusts established under a will (testamentary
trusts) that take effect upon the grantor's death. When you set up a living
trust, its trustee takes legal responsibility for any assets you place in the
trust. The trustee has an obligation under law to follow the instructions you
provide in the trust document. You can retain overall control because, if you
so provide in the trust agreement, you can end or amend the trust at any time
(a revocable living trust).
Generally, you make yourself—or yourself and your spouse—the trust's primary
beneficiaries and your children or other heirs the secondary beneficiaries. As
a beneficiary, you receive periodic income.
Private, Undelayed Transfer
After your death, the trustee of a living trust will distribute the trust
assets to the secondary beneficiaries—privately and without delay. Unlike the
process involved with a will, the living trust involves no probate court—with
its costs, time, and possible undesirable publicity. However, you still need a
will to transfer any personal effects or other possessions that, for any
reason, you do not place in the trust.
Because the trustee takes over day-to-day management responsibility for the
trust's assets, it is essential to choose an experienced professional
investment manager as trustee.
In Case of Disability
If you should ever become mentally or physically disabled—temporarily or
permanently—the trustee can step in quickly to handle all your financial and
household affairs, if properly authorized. Alternatively, you could use a
durable power of attorney to empower someone to act for you, but this may not
cover all contingencies, and it is more easily challenged than a living trust.
Without the trust (or other arrangement), a court-appointed guardian would be
necessary. The court's guardian may be someone you would not have chosen, and
the process can be complicated and costly.
When Minors Inherit
A cumbersome court-appointed guardianship may also be required if you use a
will to leave assets to your minor children. The guardianship usually ends at
age 18, placing a young adult in full control of what may be a very large sum
of money. If this is your concern, you can use the living trust to protect the
assets by having the trust continue in effect after your death and specifying
when and how your children beyond age 18 will receive distributions.
No Tax Impact
Because a grantor can generally terminate a revocable living trust at any time,
for any reason, the amount of your taxable estate is not affected. So, you
cannot view a revocable living trust as a tax strategy. On the other hand, an
irrevocable living trust—one you cannot change or revoke—may serve as an
effective estate-tax saving device. Set up properly, an irrevocable living
trust can make lifetime gifts to others and thereby reduce the size of your
taxable estate. The value of the assets gifted, plus any future appreciation,
will be exempted from your gross estate for estate-tax purposes.
Do you want to know more about a living trust? We would be happy to explore the
planning possibilities with you.
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USING LIVING TRUSTS IN YOUR ESTATE PLANNING
If your estate is more than $1,000,000 today, there's a good chance that you
will need to do some estate planning. Below that level of wealth, no federal
estate tax will apply to your estate in most cases. The reason: A provision of
the tax law called the "unified credit" permits any individual to pass up to
$1,000,000 of property (the amount will rise in steps to $3.5 million by 2009)
to others. This includes gifts made while living as well as bequests after
death.
Once your assets exceed $1,000,000, however, you'll want to protect them from
federal estate taxes that could devour as much as 55% of your taxable estate.
Leaving everything outright to charity or your spouse can shelter your estate
from taxes, but even those solutions may be fraught with complications.
For many people, trusts provide a better alternative. A trust (or trusts) can
help reduce your overall estate-tax burden, often while achieving other goals
as well.
A trust is an arrangement in which you transfer money or other assets to a
trustee who holds the assets for the benefit of another party, the beneficiary.
Living Trusts
Trusts can take effect during your lifetime (a living trust) or at death (a
testamentary trust). With an irrevocable living trust, you can make lifetime
gifts to family members and thereby reduce the size of your taxable estate.
Neither the value of the assets transferred to a qualifying living trust nor
the future appreciation in those assets will be included in your gross estate
for estate-tax purposes.
If lifetime gifts via a trust are made properly, gift taxes can be kept to a
minimum or avoided completely. Living trusts can also be used to keep life
insurance proceeds out of your gross estate or to make charitable gifts.
Marital Deduction Trusts
Federal tax law allows you to pass along any amount of assets to your spouse
without estate taxation, under a provision known as the "unlimited marital
deduction." However, your spouse may not wish, or may not be qualified, to
manage those assets. Marital deduction trusts allow you to take advantage of
the unlimited marital deduction while arranging for the management of your
assets after your death. You can even use them to pass assets to your children
or another party.
Example: You want to secure the marital deduction, but you also want to
preserve the assets for your children. You can set up a trust in your will that
provides a lifetime income for your spouse. The principal can be used to meet
special needs your spouse may have. The remaining assets are passed to your
children when your spouse dies. Your estate will qualify for the marital
deduction even though your children are the ultimate trust beneficiaries.
Credit Shelter Trusts
The unlimited marital deduction alone can result in no taxes being paid when
the first spouse dies. Yet, if you have a sizable estate, it may not prevent
estate taxes at the death of the second spouse. Why? Because the full amount of
the assets passed from one spouse to the other may be included in the second
spouse's estate.
One way to avoid this pitfall is a credit shelter trust. The first spouse's
will sets up a separate trust, one that contains assets equal in value to the
unified credit (i.e., the $1 million of excludable estate value under federal
tax law). This trust can provide for the second spouse while he or she is still
living, but the trust property's will not be included in the surviving spouse's
gross estate.
Example: Your gross estate is $2 million in 2001. You place $1 million in a
credit shelter trust and $1 million in a marital deduction trust. Due to the
your unified credit, the amount in the credit shelter trust will pass estate
tax free. The amount in the other trust avoids tax because of the unlimited
marital deduction. Later, when your spouse dies, only the amount in the marital
deduction trust is included in his or her gross estate. If he or she has no
other assets, that $1 million will pass estate tax free due to the application
of your spouse's unified credit.
This article contains only a summary of the use of trusts in your estate-tax
planning strategy. If we can help you in your individual situation, please call
us anytime.
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CHARITABLE TRUSTS: AN OVERVIEW
If you are planning your estate and wish to give part of it to charity, you may
be a candidate for a charitable trust.
A charitable trust is a unique giving opportunity because it not only allows
you to give to the charity of your choice on your schedule, but it also allows
you to secure a current income tax deduction.
If you make your charitable contribution in your will, the amount of your
contribution will be deductible for estate tax purposes. So you pay no estate
tax on the donated assets. However, a lifetime charitable trust allows you to
make the gift, avoid estate taxes on the donated assets, and get a current
income tax deduction at the time you make the gift without having to give up
total control of the amount given.
Charitable Remainder Trust
Say you want to donate some of your assets to charity, but you'd also like to
see the income from those assets go to yourself, someone in your family, or
another beneficiary for a certain amount of time. A charitable remainder trust
will allow you to do that. When you set up the trust, you can designate
yourself or any other person to receive income from the trust for life or up to
20 years. Your designated charity will receive the remaining assets at the end
of that time period.
But how can you determine the amount of the deduction if the charity will not
actually receive its gift until some future date? And where does the current
income tax deduction fit in? The IRS uses tables and formulas to determine the
value of a future gift to charity. Of course, the higher the IRS determines the
value of your gift, the higher your deduction will be. You can deduct the
IRS-determined value of your gift for income tax purposes, assuming all tax law
requirements are met.
Usually the charitable remainder trust is set up as either a unit trust, which
pays the income beneficiary a percentage of the trust fund each year, or an
annuity trust, which pays a fixed dollar amount each year.
Suppose you are 60 years old and eventually want to contribute $1 million to
charity. You set up a charitable remainder trust with the $1 million and
arrange for $70,000 of trust income to be paid to you annually for life. You
would be entitled to an immediate income tax charitable contribution deduction
of about $365,000 (within tax law limits). In addition, at your death, the
entire value of the assets passing to the charity would avoid estate taxes.
The Charitable Lead Trust
You can also name the charity as the income beneficiary of your trust. The
charity would then receive the annual income payments from the trust, and you,
your family, or whoever else you choose will receive the remainder. This is a
good strategy if you have little immediate need for additional income and are
willing to give up the income for the income tax advantage. In this type of
trust, as with the charitable remainder trust, the IRS tables determine the
value of your gift, and, hence, your deduction. That is based on the amount of
income the charity receives each year and the number of years the trust is
operative.
If you would like more information on charitable trusts, please don't hesitate
to call us.
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Life Insurance Trusts
You wouldn't consider a new house completed if the wiring and plumbing were not
yet installed. And it's unlikely that you'd walk away from the project while
those critical tasks remained unfinished.
Yet, this is essentially what many people do when it comes to insurance
planning. Once they've bought a sufficient amount of life insurance, they
abandon their insurance planning. But insurance planning is like building a
house: Several steps must be taken, and in the appropriate sequence, before the
task is truly completed. In reality, buying life insurance is only the first
step in sensible insurance planning.
The next step is planning what will happen to the proceeds of your life
insurance policy after they are distributed. If the proceeds are distributed
directly to your beneficiaries, will they invest those funds wisely? Do they
have the time or the expertise to make the most of those precious resources
until their many short- and long-term needs are met?
If you are unable to answer these questions satisfactorily, then you might
consider a life insurance trust as one sensible and easy method of maximizing
the benefits of an insurance payout. A life insurance trust lets you name a
trustee who will collect the insurance proceeds when you die. The trustee then
invests those proceeds and makes interest and principal distributions to your
beneficiaries exactly as you instructed when you created the trust.
And life insurance trusts have a built-in flexibility. For example, you can
give the trustee the power to tap into the trust principal if an emergency
demands such action. Or you can structure the trust document so that it
provides money for the education of a child or grandchild.
The trust's flexibility really shines where there are minor children involved.
The trustee can manage the insurance proceeds for the children until they reach
the age where they are capable of handling the proceeds themselves.
One other very important aspect of a life insurance trust is that it can be
used to unify your estate plan. Any employee death benefits due your
beneficiaries can be made payable to the trust. Also, you can arrange in your
will for other assets to "pour over" to the trust. Thus, all of your assets can
be administered by a single trustee.
So, a life insurance trust is really one more step in the protective cycle for
your family that you began when you first bought life insurance. Is an
insurance trust for you? That depends on the size and complexity of your
estate, the ages of your children or grandchildren, and on a variety of other
factors. Why not call us today. Together, we can determine if a life insurance
trust fits your needs.
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