Retirement Income Blog

Trusts play a big part in estate planning. What you don’t know about them can hurt you and your beneficiaries’ financial health and possibly your own.
 
A trust is a legal entity - just like a corporation or a person. It holds assets for a beneficiary.  The beneficiary could be you or another person. A trust document states the purpose of the trust and how it’s to be carried out. A trustee is the person (or entity) that carries it out. The grantor (e.g. you) creates and generally funds the trust.  Trusts in estate planning play a major role as you shall see.

A trust can be revocable or irrevocable. Revocable means that the grantor can decide to revoke the trust and take all the assets back for his use. In fact, such a revocable trust is really an extension of the grantor and taxed as if all the trust assets and their income were his. The most well known type of revocable trust is the living trust.  During your lifetime, this trust is transparent–it does not affect anything.  But upon death, the living trust contains a set of instructions that states how assets are to be divided.  As you see, the use of trusts and estate planning go hand in hand.  Because of the interrelationship and trusts and estate planning and retirement planning, it is a good idea to have single certified retirement planner assist with the overall strategy.

Revocable trusts serve to avoid probate. Probate – the court process of transferring assets in a deceased’s name by will or intestate - is a very public process. Trusts are not subject to probate – being a separate entity from the deceased – and can privately pass assets according to the terms of the trust. One of the objectives of trusts and estate planning is to retain privacy.  The additional benefit of a revocable trust is that it allows the grantor to control the assets and income of the trust as he wishes while he’s alive.

An irrevocable trust –once created by the grantor – is no longer under his control. It’s controlled solely by the trust document and the trustee. In this case, it’s taxed as a separate entity –unlike the revocable trust – and has an existence all its own.  In our tax system, whoever has the ability to control an entity is taxed and responsible for what that entity does. The irrevocable nature of a trust breaks that connection relieving the grantor of any subsequent tax or control issues. However, in reality, the trustee is usually a friend, relative or confidant of the grantor over which the grantor has influence and thus, can still exert indirect control over trusts assets. In this case trusts and estate planning serve to separate control (which the grantor still exerts) from ownership.  Assets are removed form the grantor’s estate with favorable estate tax and asset protection consequences.

The legal separateness of an irrevocable trust allows key benefits. First, that the grantor determines how the assets he puts in it are to be handled and distributed to his assigned trust beneficiaries – according to how he writes up the rules of the trust document. Second, the trust as a separate entity, can survive him indefinitely allowing his wishes to continue beyond his death. Third, the beneficiary, the object of the trust, benefits from the trust. Last, the trust’s legally protected from others (i.e, creditors) who may try to invade it or take the trust assets. Trusts in estate planning play these four major roles as just explained.

The use of trusts in estate planning have a clear objective to achieve. Examples of such trusts are:
o Spendthrift protection
o Charitable trust
o Life insurance trusts
o Asset protection trusts
o Bypass Trusts
o Qualified Personal Residence Trust (QPRT)
o Qualified Terminal Interest Property Trust (QTIP)
o Generation-Skipping Trust
o Irrevocable Life Insurance Trust ILIT

Trust planning, while seemingly complex, becomes easier to understand when you focus on the primary objectives of trusts–reduced taxation and creditor protection.

Bookmark It

Will planning, trust planning and estate planning is not just for older people.  It’s for anyone that wants to avoid heartache for those they love. It’s simply a asset of instructions to distribute property to those who you want to have your property. 

If you have a will your property will go to those you want to have it and there is no other way for you to have this assurance because the State will determine who gets your assets if you don’t have a will.  Additionally, by planning your will, friction and arguments will be lessened among beneficiaries.  Without your instructions, how will they know who gets what?  Moreover, the potential for large legal fees and court costs can be minimized because you avoid litigation among family members.  And of course, with proper will planning, The estate will be settled more promptly.  A good retirement planning calculator will help you estimate the size of your estate to be planned.

The major aspects of the planning are
1. To decide who you want to name as beneficiaries (both primary and contingent)
2. What you want each beneficiary to receive
3. You can name an executor/executrix to manage the distribution of your assets
4. If you have children, can name a guardian to care
5. Make an charitable bequests

Some people avoid will estate planning because of superstition—that if they plan the distribution of their assets they will die.  You will be comforted to know that there is no research or statistics to support this.  In fact, there’s a statistics floating around that 75% of attorneys die without a will.  That would support the case that people without a will are more likely to die!  So plan and prepare your will now!

Don’t delay estate planning because there are things you cannot decide.  For example, if you are torn about which beneficiaries to indicate or what to leave them, just have a will made anyway with your “best guess.”  You can always change it later.  And since you can use will planning and preparation software, you can change your mind as often as you desire without cost.  Or you may be undecided about charitable beneficiaries.  Again, you can change, add or delete charities at any time to your will.

Below find the information you need.  If you don’t want to prepare your own will, it’s a relatively inexpensive attorney’s fee to have it done. 

• Names and address of each beneficiary.  If a relative, state relationship.
• If any of your beneficiaries were to predecease you, name the contingent beneficiary (next in line)
• List specific bequests to be made to each of those persons listed above. Describe the gift, the amount of money or percentage of the estate to each recipient.  It’s best to use percentages.
• Names and addresses of charities for charitable requests and amount (again, best if a percent of your estate)
• If minor children are living at the time of making a will, you should name a guardian for their care. 
• Appoint your executrix/executor. Husband and wife often name each other. Specify if they will serve without being bonded in administering your estate. Again an alternate should be named.

Bookmark It

One of the topics we cover on this blog is estate planning as its unlikely you will spend every last dime before you die.  So let’s consider trust planning and how to leave assets to your heirs, just in case there’s some money left over.

I am a big fan of leaving money in trust to provide trust income to your heirs and not leaving assets outright.  Leaving assets outright has several problems:

• Your heirs may blow the money, intentionally or not
• The creditors of your heirs can get at it
• An alienated spouse can get at it (if they are clever)

If you leave money in trust, you can set it to give your heirs a trust income and not expose the principal to any of the above problems.  Of course, you can provide additional flexibility through the trustee.  You can empower the trustee (the person who is responsible for the trust on behalf of your heirs), to make discretionary distributions of trust income.  For example, if you your heirs get $20,000 annually from the trust, you can empower the trustee to make additional distributions of trust income or trust principal for certain purposes such as education or starting a business or buying real estate.

It’s important that the trust distribute its income each year because trust income left in the trust is taxed at very high rates:

By distributing the trust income to the beneficiary, the trust will not pay any tax and the income will be taxed to the beneficiary at much lower rates.

How important is trust planning?  You can consult retirement income calculators to see how much income you need, how much of your assets are likely to not be exhausted and to what extent to carry out estate planning.

Bookmark It