Protect Assets and Reduce Taxes with Trusts

By Lee Bellinger / May 11, 2015

Proceed with Great Care and Respect for the Law

Can you benefit from putting assets in a trust? Chances are the answer is yes.

It is a common misconception that trusts are only useful for wealthy people. When set up properly, trusts can be appropriate for most people. Especially for people with minor children or anyone who wants to avoid having their estate go through probate upon death. Trusts can be used instead of corporations if you are in business. Trusts or specialized legal contracts can also be used
instead of prenuptial agreements in marriages.

Be sure to consult a licensed attorney experienced with estate planning and trust matters before making any final decisions about whether a trust is right for you. Actual experience in the field is necessary. Be certain you question your prospective lawyer about his or her specific experience in this field. Best to make sure he or she is detail oriented, and preferably very familiar with estate and tax planning law. Don’t do business with corner cutters.

Do your own thinking and research and beware of referrals unless you ask all these hard questions first.

Surprise, Surprise… Why a Trust Might Well Fit Your Needs

Creating a trust (or trust fund) establishes a legal entity that holds property or assets for the person who created it. The person who creates the trust can be called a grantor, donor, or settlor.

When the grantor creates the trust he or she appoints a person or entity (like the trust department of a bank) to manage the trust. This person or entity is called a trustee. The grantor also chooses someone who will ultimately benefit from the trust. This person is the beneficiary.

In some situations the grantor, trustee, and beneficiary are all the same person. In such a case, the grantor should also appoint a successor trustee and beneficiary in case he or she dies or becomes incapacitated.

Some common reasons for setting up a trust include:
• Providing for children or family members who are unable to handle financial matters.
• Providing for management of personal assets should you become unable to handle them yourself.
• Avoiding probate and immediately transferring assets to beneficiaries upon death.
• Reducing estate taxes and providing liquid assets to help pay for them.
• Privacy – the terms of a will are public while the terms of a trust are not.

The ABCs of Setting Up a Trust: Ask Hard Questions

A trust, by design, can be very flexible. A grantor has the right to tailor it to meet the anticipated needs of the beneficiary. Working with an experienced attorney who specializes in estate and trust issues and who knows the specific state regulations can help get the maximum benefit from the trust. The American College of Trust and Estate Counsel (202-684-8460; may be able to help you locate a trust attorney close to you.

The grantor and the trustee might have very different ideas about investment strategies, so make sure this gets clearly defined. The grantor has the right to specify exactly how the money in the trust is invested. The grantor can specify exactly how the assets should be divvied up down to details like an annual cost of living adjustment for the beneficiary. Or paying for travel expenses for others to visit the beneficiary in the case of illness.

Always be sure to include a “trustee removal clause.” Trusts that don’t have this clause take away the beneficiary’s right to fire the trustee if unsatisfied with the service being provided. Remember that the grantor can always add a provision that requires the beneficiary to select a new trustee from legitimate bank trust departments.

Upon establishment of the trust the grantor must transfer his or her assets into the trust. Failure to do this properly makes the trust null and void. This means that upon the grantor’s death the state will decide who gets the assets and cares for minor children. If the grantor wants to ensure that upon death any assets that remain outside of the trust are transferred to it, he or she should consider having a “pour-over” will to accomplish this.

Which Type of Trust is Best for Me?

Trusts can be living (inter vivos) or after-death (testamentary). A living trust is one that a grantor sets up while still alive. An after-death trust is usually established by a will after one’s death. Living trusts may be either irrevocable (can’t be changed) or revocable (can be changed). Revocable trusts don’t receive the same tax shelter benefits as irrevocable ones do.

By far the most popular type is the revocable living trust.

If there’s a specific purpose in mind for the trust, dozens of different options exist. Some examples include charitable trusts, bypass trusts, spendthrift trusts, and life insurance trusts. New laws have even established a trust that will care for a pet after one’s death

Trusteed IRAs Give You More Control When Helping Your Grandkids

If you have an Individual Retirement Account you are planning to leave to your heirs, you might consider making it a trusteed IRA. A trusteed IRA gives your retirement account some of the estate planning benefits that come with a trust. You can make sure your IRA funds aren’t spent or taxed away upon your death.

The upshot is that setting up a trusteed IRA is cheaper and more efficient than setting up a separate trust. That’s why trusteed IRAs are gaining in popularity with people in or nearing retirement.

Charitable Remainder Trusts Can Be Quite Tax Efficient

A charitable remainder trust can be an ideal way to support a charity while minimizing tax liabilities on appreciated assets you hold. This type of trust allows the grantor to take a 5% or greater income interest or designate the income to a beneficiary.

Bob Keebler of American Institute of CPAs explains: “During the term of the charitable trust, the income interest is generally paid out to the donor or some other named individual. At the end of the trust term, when the donor dies or when that individual dies or after a term of years, whatever’s left in the trust is paid to a charity.

“This is a very powerful strategy for someone that wants to make sure property eventually passes to their favorite charity. It’s also powerful from an income tax perspective and to reduce the net investment income tax.”

Other Types of Trusts for Other Types of Needs

Dynasty trust: In states that allow dynasty trusts, they can be a tool to build a pool of family wealth. “These trusts allow families to use wealth-transfer tax exemptions of up to $5.34 million per person to place assets in trust and let them grow untouched,” according to the Wall Street Journal.

Crummey trust: This versatile trust enables you to pass financial assets to your heirs tax-free. The trust can be established for multiple beneficiaries, including those who are over age 21. Until the estate tax is eliminated, a Crummey trust is one of the best ways to legally avoid it.

Qualified personal residence trust: This type of trust can be a useful vehicle for holding a vacation home. The property can then eventually be passed on to family members without triggering full transfer taxes.

Grantor retained annuity trust (GRAT): This trust is used typically for a term of three to five years to avoid wealth-transfer taxes. GRATs allow gains on assets that appreciate within the trust to be distributed to family members or other trusts free of gift or estate taxes.

AB trust: It may also be referred to as a “credit shelter trust,” a “marital life estate trust,” or an “exemption trust.” If you are married and have children, having an AB living trust might be to your benefit. Each spouse leaves property in trust to the other for life, and then to the children.

Irrevocable life insurance trust: If you own life insurance and think your estate is large enough to trigger the death tax, then consider creating an irrevocable life insurance trust. Keep in mind that irrevocable trusts have strict requirements and offer less flexibility than revocable trusts.

You Also Need These Tips for Avoiding Scams, Fraud, and Legal Headaches

If someone approaches you to set up a trust, be cautious. Before signing any papers to create a will, living trust, or other kind of trust make sure to explore all options. Shop around for this service just as you would for any other.

Be wary of pitches for offshore trusts. They tend to be costlier to set up and may carry special reporting requirements. The IRS takes a “guilty until proven innocent” approach to anyone who holds offshore accounts. And while most offshore trust arrangements are legal, some offshore promoters will boast of tax benefits that don’t (legally) exist.

The potential advantage of an offshore trust is that it will be difficult for creditors to get to. That potential advantage must be carefully weighed against the disadvantages.

Some final tips:
• Don’t do business with anyone who uses high-pressure sales tactics.
• Do your homework and get information about local probate laws from the Clerk or Register of Wills.
• If someone tries to sell a living trust to you, ask if they are an attorney. Some states restrict sales of living trusts by licensed attorneys.
• If you buy a trust in a location that is not the seller’s permanent place of business, remember you are entitled to take advantage of the Cooling Off Rule. That means you can cancel the transaction within 3 business days.

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