Estate Plan Trusts

What is a Trust?

A Trust, generally, is a legal entity that can hold title to property. There are three parties to a Trust agreement: the Trustmaker who creates the Trust, the Beneficiary who receives the benefit of the property held in the Trust, and the Trustee who manages the Trust. The property that is transferred to and held by the Trust becomes the Trust principal. If you create a Trust within your Will, it is called a Testamentary Trust. If you create a Trust while you are alive, it is called an inter vivos or Living Trust.

While you are alive, you usually will receive all the income of the Trust and as much of the principal as you request. Upon your death, the Trust assets are distributed to your Beneficiaries in accordance with your directions contained in the Trust agreement, or it can continue for specified purposes for a period of time.

The Advantages and Disadvantages of a Trust

The Main Advantages of a Living Trust:

If you want or need to have someone else manage your property and pay your bills in case of illness or disability, the Living Trust is an ideal estate planning tool for you.
Avoiding probate which can save time and money, especially if you own real estate in different states.
Because a Living Trust is not filed in Court, its provisions are private. This differs from a Will, which must be filed with the Probate Court and becomes public.
Reduction of delays in distribution of your property after you pass away.
Continuity of management of your property after your death or incapacity/disability.
The Main Disadvantages of a Living Trust:

There are usually more initial costs in setting up a Living Trust as compared to a Will because a Living Trusts generally requires more extensive, technical and complex drafting.
“Funding”, which is the process of re-titling your assets in the name of your Living Trust, takes time.
Administering the Trust can be expense depending on who is acting as Trustee.
Trust vs Will: Which is Right for You?

How do you know if you need a Trust instead of a simple Will? Many people assume that Revocable Living Trusts are only for the wealthy, but Revocable Living Trusts have benefits even for the average person. If your life or financial situation fits into one or more of these categories, then you should consider a Revocable Living Trust.

Planning for Disability

Regardless of your net worth, and particularly if any of your assets are titled solely in your name, then you should consider a Revocable Living Trust for disability planning to avoid court-supervised guardianship or conservatorship.

Estate Planning for Minor Beneficiaries

Parents with minor children and who have life insurance policies or retirement plans with high values should consider a Revocable Living Trust. In the event both parents die while the children are still minors, the insurance or retirement funds will be placed in the Trust for the benefit of the children instead of in a court-supervised guardianship or conservatorship.

Estate Planning for Singles

Anyone who is single and has assets titled solely in their name should consider a Revocable Living Trust to avoid court-supervised guardianship and the costs and hassles of probate.

Tax Planning for Married Couples

If you are married and the combined estates of you and your spouse exceed the Federal exemption of $3,500,000 or your state’s exemption ($1,000,000 for Maryland the Washington, DC), then you should consider establishing a Revocable Living Trusts to eliminate or avoid estate taxes.

If You Own Real Estate in More Than One State

If you own real estate in more than one state or outside of your home state, then you should consider a Revocable Living Trust to avoid multi-state probate.

I hope this information helped you better understand Trusts and how they fit into the estate planning process. As always, if you have any questions about any aspect of estate planning, I invite you to contact me by phone (888-495-7289) or visit our website or blog.

Nicole K. White, Esq. established Kinsey Law Group, P.C. to help and educate individuals and families in the areas of ASSISTED REPRODUCTION/SURROGACY and ESTATE & HEALTH PLANNING.

Estate planning, trusts, wills and living wills are confusing and convoluted. Estate plans cover several of these items, but trusts can be a different matter. With state and federal laws regarding inheritance and property changing every year and contributing to the confusion, an individual or family should not rely on a do-it-yourself approach. What poses a more challenging and problematic situation is if there is an individual with physical disabilities or developmental special needs. Because the laws change constantly, the services of an experienced attorney need to be used.

When an individual dies without a will, also known as intestate, the assets are left for the courts to decide the best method to distribute them. The process of probate is usually never swift and even the simplest estate can often be diminished to the extent where the remaining assets are almost nonexistent. Conversely, should the entire estate be left solely to the spouse, the taxable estate of the spouse may very well increase. In the event that the spouse also passes away, the children will be left with higher taxes as well. Estate tax exemptions are available, but may not be taken advantage of without taking the proper steps.

Assigning a power of attorney is also an important component of estate planning. Not to be confused with a living will, should an individual be ill or unable to be present to make decisions about personal property and finances, a power of attorney authorizes a second party to legally make decisions in their stead. A living will does not pertain to the individual’s property, but the medical care provided.

In the event that a person becomes too ill, incapacitated or otherwise incapable of making their own decisions regarding their personal medical care, a living will prepared ahead of time will spell out the medical care desired or forbidden. An example of this would be to forbid using artificial life support when permanent brain damage has caused the brain to cease any activity.

A complete estate plan will include much of the above, but when there is a special needs or physically disabled individual, additional detailed and complex provisions need to be arranged. Without additional planning, it is almost a certainty that the disabled or special needs family member will end up in a state institution receiving only the mediocre care that lack of money can provide. Trusts are not always part of an estate plan, but are an integral part of ensuring that the special needs individual will receive the appropriate medical care after the parents have passed. Without planning for the inevitable would just be criminal for which there is no punishment.

For those of you not familiar with the 2005 Tax Reduction Act, some of the provisions address specific transfers by seniors under the new Medicaid nursing home provisions. Under the new provisions, before seniors qualify for Medicare assistance into a nursing home, they must spend-down their assets. These new restriction have a 5-year look-back. The look-back used to be 3 years.

By a vote of 216-214, the U.S. House of Representatives passed budget legislation that will impose punitive new restrictions on the ability of the elderly to transfer assets before qualifying for Medicaid coverage of nursing home care. You can link to the new law Deficit Reduction Act of 2005 in PDF format, click on: http://www.rules.house.gov/109/text/s1932cr/109s1932_text.pdf. The section on the transfer provisions begins on page 222.

WHAT’S MEDICAID?

What’s Medicaid? Medicaid is a government assistance program for people over the age of 65 or who are disabled. Medicaid assistance was designed for those who could not afford medical expenses (for the poor) but Medicaid has become the default for the middle class. The middle class has become the new poor.

Medicaid planning and Medicaid rules are complicated. The government is mandating a 5-year look-back on any transfers you may have made to disqualify you from entering the nursing home. Before the 2005 Tax Reduction Act it was 3 years. The transfer of any assets by the elderly has taken a notation of a “fraudulent conveyance” or in government parlance “deprivation of resources.”

These new rules are spousal impoverishment programs designed to punish the healthy spouse. If one of the spouses gets sick, all resources have to be spent before you can qualify for government assistance. These new restrictive rules punish the healthy spouse leaving the healthy spouse at the mercy of welfare or her children. It’s very humiliating when seniors have planned their retirement based on their ability to keep their home.

ASSETS YOU MUST SPEND DOWN

Assets that you must spend down before you can qualify for nursing home assistance. Anything you own in your name or together with your spouse. Cash, savings, checking, certificate of deposits, U.S. Savings bonds, credit union shares, Individual Retirement Accounts (IRA), nursing home trust funds, annuities, living revocable trust assets, any revocable Medicaid estate planning trust, real property occupied as a home, other real estate you hold as investment property or income producing property, cash surrender value of your life insurance policy, face value of your life insurance policy, household goods and effects, artwork, burial spaces, burial funds, prepaid burial if they can be canceled, motor vehicles, land contracts, life estate in real property, trailer, mobile home, business and business property, and anything else in your name or your possession.

WHAT DO YOU MEAN “FRAUDULENT CONVEYANCE”?

What do you mean by “fraudulent conveyance” or “deprivation of resources.” If you give away your assets and you do not receive an equal amount (value) in return, the transfer is a deprivation of resources and you have committed a fraudulent transfer, (you give your house to your children for $100.00 when the fair cash value of your home is i.e. $150,000). If you gave your house to your children for $100 sixty months (5 years) before you entered the nursing home, you “deprived your resources” from the nursing home expenses. Unwittingly, you also incurred a gift tax on the difference between the $100.00 and the $150,000 and in addition you may have cheated the government out of Estate Taxes.

HOW FEDERAL GIFT TAX APPLIES?

The gift tax rules apply to the transfer by gift of any property. You make a gift if you give property (including money), or give the use of property, or give the income from property without expecting to receive something of at least equal value in return. If you sell something at less than its full value or if you make an interest-free or reduced-interest loan, you may be making a gift.

The general gift tax rules are that any gift is a taxable gift. However, there are many exceptions to this rule. Generally, the following gifts are not taxable gifts:

- Gifts that are not more than the annual $12,000 exclusion for the calendar year beginning in 2006 (This is called the Annual exclusion for any 12 month period, see below).

- Tuition or medical expenses you pay directly to a medical or educational institution for someone,

- Gifts to your spouse,

- Gifts to a political organization for its use, and

- Gifts to charities.

- Annual gift tax exclusion. A separate annual gift tax exclusion applies to each person to whom you make a gift. For 2007, the annual gift tax exclusion is $12,000. Therefore, you generally can give up to $12,000 each to any number of people in 2007 and none of the gifts will be taxable. However, gifts of future interests cannot be excluded under the annual exclusion provisions. A gift of a future interest is a gift that is limited so that its use, possession, or enjoyment will begin at some point in the future. A federal Gift Tax return is filed on form 709 for taxable gifts in excess of the annual exclusion.

FILING A GIFT TAX RETURN

Generally, you must file a gift tax return on Form 709 if any of the following apply:

- You gave gifts to at least one person (other than your spouse) that have a fair “cash” value of more than the annual exclusion of $12,000 for the tax year 2007.

- You and your spouse are splitting a gift.

- You gave someone (other than your spouse) a gift of a future interest that he or she cannot actually possess, enjoy, or receive income from until some time in the future.

- You gave your spouse an interest in property that will be ended by some future event.

- Your entire interest in property, if no other interest has been transferred for less than adequate consideration (less than its fair “cash” value) or for other than a charitable use; or

- A qualified conservation contribution that is a restriction (granted forever) on the use of real property

HOW ESTATE TAX APPLIES?

Estate tax may apply to your taxable estate at your death. Your taxable estate is your gross estate less allowable deductions. On the date of your death, everything in your name is taxable. Take inventory of what you own: Cash, Savings and checking accounts, CDs, Stocks, Mutual Funds, Bonds, Treasuries, Exempts, Jewelry, Cars, Stamps, Boats, Paintings, and other collectibles, Real Estate … main home, vacation spot, investment realty, your Business, Interests in other businesses, Limited Partnerships, Partnerships, Mortgages and notes receivable you hold, Retirement plan benefits, IRAs, or any amounts that you expect to inherit from others.

Many people prefer not to think about what will happen on their death, but none of us are immortal and failure to make proper plans can mean that we leave behind is a mess which has to be sorted out by our nearest and dearest, at great expense and inconvenience, at a time when they are emotionally bankrupt.

Your federal death (estate) tax, up to 55%, is based on the “fair cash value” of your property on the date of your death, not what you originally paid. State probate and death taxes are based on the “location” of your property. Thus, if you own property in different states, each state has to be probated and each will want their fair share. The only real alternative to a will arrangement is to set up a trust structure during lifetime which, with careful planning, can operate to eradicate probate delays, administration costs, and taxes as well as giving a large number of additional benefits. For these reasons the use of trusts has increased dramatically.

WHAT IS YOUR GROSS ESTATE?

Your gross estate includes the value of all property in which you had an interest at the time of death. Your gross estate also will include the following:

- Life insurance proceeds payable to your estate or, if you owned the policy, to your heirs;

- The value of certain annuities payable to your estate or your heirs; and

- The value of certain property you transferred within 3 years before your death.

WHAT IS YOUR TAXABLE ESTATE?

The allowable deductions used in determining your taxable estate include:

- Funeral expenses paid out of your estate,

- Debts you owed at the time of death,

- The marital deduction (generally, the value of the property that passes from your estate to your surviving spouse), and

- The charitable deduction (generally, the value of the property that passes from your estate to the United States, any state, a political subdivision of a state, or to a qualifying charity for exclusively charitable purposes).

HOW GIFT TAXES & ESTATE TAXES APPLY TO MY ESTATE:

If you die in the tax year of 2007, your “taxable estate exemption” is $2,000,000, your “gift tax exemption” is $1,000,000 and you have a maximum estate tax of 45%.

If you die in the tax year of 2008, your “taxable estate exemption” is $2,000,000, your “gift tax exemption” is $1,000,000 and you have a maximum estate tax of 45%.

If you die in the tax year of 2009, your “taxable estate exemption” is $3,500,000, your “gift tax exemption” is $1,000,000 and you have a maximum estate tax of 45%.

If you die in the tax year of 2010, your “taxable estate exemption” is $0.00 (i.e. it’s repealed), your “gift tax exemption” is $0.00 (i.e. it’s repealed as well) and you have a maximum estate tax of 55%.

13 times in 32 years, congress has changed the rules. Congress is always tinkering with the “Death Transfer Tax.” For more information on what is included in your gross estate and the allowable deductions, see Form 706.

HOW TO AVOID THESE UNPLEASANT RESULTS?

You can avoid all of the above unpleasant results and filing requirements with an irrevocable trust implemented 60 months before you plan to qualify for the nursing home.

By repositioning your assets (transferring your assets) from you to an irrevocable trust, you will NO longer own the assets:

- you don’t qualify for the probate process, and

- you do not have to file an estate tax return,

- because on the date you qualify for the nursing home you do NOT own any assets,

- at the time of your death you do NOT own any assets for the probate process,

- and at the date of your death you do NOT own any assets to report on your estate tax return.

author bio – Rocco Beatrice, CPA, MST, MBA

award-winning estate planning & trust expert

MS – Taxation, Master of Science Taxation

This overview presents the key issues to consider when designing and executing the best estate plan. Also, the work does not stop at signing your estate plan documents; you must also complete the follow up work of beneficiary designations, memorandum to fiduciaries, etc. The goal is to avoid the pitfall of no plan done and the disaster when wills and trusts are in place but the asset ownership and beneficiary designations frustrate the plan by having assets pass to the spouse and not the trust.

If you do nothing else after reading this, write and deliver a “Memorandum to Survivors” and review asset ownership, all as described at the end of this post.

A comprehensive estate plan can accomplish many goals, such as providing for survivors, ensuring your children are cared for, determining the flow of your assets upon your death, and reducing the amount of taxes your estate will pay while administering your estate. The most important goal is that you have peace of mind knowing that your estate will be administered in accordance with your wishes.

Estate Planning Pyramid

Constructing a pyramid can be helpful for understanding all that goes into an estate plan, much like nutrition and investments. Each level of the pyramid addresses a new level of complexity in your family and financial situation – that is, everyone needs level one, but not all need the later, more complex levels.

Pyramid: Level One

The first level of estate planning provides the most basic protections so it is most suitable to single individuals with no children and few assets. This level of estate plan typically includes the following forms:

Health Care Proxy: This document allows you to appoint people to make decisions about your health care and treatment when you are not capable of doing so. You typically select the surviving spouse and then have a first and second alternate if you wish. Some states call such documents “medical directives” or “medical powers of attorney.”

Living Will: This makes your wishes clear as to whether or not you want to have heroic means used to prolong your life.

Anatomical Gift Instrument: This allows you to have a hospital use organs and other body parts for others in need of a transplant.

Pyramid: Level Two

The second level is most appropriate for individuals in committed relationships. This level includes all the forms listed in the first level, but adds a durable power of attorney. This document grants a power of attorney to the other to manage your financial affairs if you are absent or you become incapacitated.

Pyramid: Level Three

When you have children, you want to ensure that they will be both cared for and provided for in the manner you wish. To achieve this, you need a will to appoint a guardian, for the “care,” and create a trust to manage assets, for the “providing.”

A will is a formal document that designates your personal representative or executor, any alternates, plus a guardian and any alternates for children under age 18, then instructs your personal representative to pay off your debts, and distribute your estate per your wishes.

A trust is an entity that you create and can be used for many purposes. The trustee acts as the owner of what the trust holds, while the beneficiaries get all the benefits from what the trust holds. For estate planning, trusts are used to reduce estate taxes in various ways. Trust vehicles can also describe how and when assets are distributed. For example, the grantor of a trust could insist that assets not go to children until they are age thirty-five. The trust vehicle could also provide where assets flow if all family members die without issue. For example, assets could flow to a charity or educational institution.

Providing for Survivors: You need to address how your assets and any life insurance flow after your death in order to ensure that your resources allow those who survive you to maintain the same standard of living, during their life expectancies, that you all had during your life. If your investments are not sufficient, even after making liquid certain kinds of personal property (e.g., a second home), then there is a need for life insurance.

Life Insurance: Term insurance, providing only a death benefit, funds the shortfall between assets required to maintain the lifestyle of the survivors and actual assets available. Whole life, variable or other types of insurance should only be used when permanent insurance is required, as in the case of maintaining estate liquidity throughout your lifetime.

Flow of Assets: After you determine the assets required to support the lifestyle of the survivor, you determine to whom the assets flow. For example, at Levels One and Two, you can leave everything directly to survivors, while at Levels Three to Six, you use a trust, and at Level Six you may even separate some portion of the assets by gift now.

Control Over Assets: In Levels One and Two, the survivors have complete control over the assets. At higher Levels, trust vehicles are used for the estate tax savings. However, you also gain a heightened level of attention on the assets: you have engaged a trustee to focus on providing for the surviving spouse, maintaining his or her lifestyle, while still attending to the interests of other beneficiaries, such as children. In this way, the trustee will try to preserve the trust assets in the best way possible for the longest duration. Finally, the trustee must distribute the assets per your instructions; if assets went to a survivor, they are not bound in any way to follow your wishes, so you may not achieve your estate planning goals.

Fiduciaries: In designing the estate plan, many choices revolve around the fiduciary that you select for a particular role.

Personal Representative or Executor: This is the person who “marshals” all assets of the estate together, pays death expenses and transfers ownership of property to the surviving spouse or trust. This is approximately a nine-month task.

Guardian: This is the person whom you select to love and care for your children in your absence. The spouse selects the surviving spouse and then a second or third choice beyond that. This job lasts until each child has reached majority (age eighteen).

Trustee: This person has potentially the longest-term job because he or she must manage the trust assets and make distributions of income and sometimes principal to the surviving spouse, children and even grandchildren. Depending on the terms of the trust, this job could last until the children are young adults.

Beneficiary Designations and Ownership: ownership and how life insurance proceeds and retirement plan assets flow is described below.

Pyramid: Level Four

This level of planning addresses state taxes. When the potential combined estate of a husband and wife exceeds $1 million, and they have other beneficiaries for whom they want to maximize the estate after taxes, then trusts are typically used. States such as Massachusetts impose an estate tax over $1 million. Other states have similar amounts, but many are increasing, such as New York which will match the federal credit in 2019. Therefore, additional planning is required if you reside in a state with an estate tax.

Pyramid: Level Five

The fifth level contains trusts that address federal estate taxes, as well as state. Congress has retained the unified gift and estate tax credit, now at approximately $5.34 million (inflation adjusted) with a 40% estate tax rate (up from 35% last year). In addition, the unused portion of the estate tax credit of a deceased spouse is “portable”, allowing it to pass to the estate of surviving spouse.

With the trust structure, sub-trusts can be created so that both the credit and the marital deduction are used. This structure takes advantage of the credit at the first and second deaths. In contrast, wills that pass all assets outright to the surviving spouse would only take advantage of the credit at the second death. The total tax savings for an estate of $10 million or more is excess of $1.75 million for the combined estates.

Life Insurance Trust: You can also make an irrevocable trust the owner of any insurance on your life to exclude all proceeds at death from both estates, avoiding estate taxes. That is, the proceeds are completely estate tax free. However, this requires an irrevocable transfer to the trust; you cannot get the insurance back out. You can use this trust to receive insurance proceeds that can pay for estate taxes, thereby preserving more of your estate after taxes without increasing the taxable estate.

Pyramid: Level Six

The final level is for complex estate planning that minimizes federal and state estate taxes through multiple generations. An example of this is a generation-skipping trust. These trusts transfer assets from the grantor’s estate to his or her grandchildren. This is what allows the grantor’s estate to avoid taxes that would apply if the assets were transferred directly to his or her children. The grantor’s children can still enjoy financial benefits of the trust by accessing any income that is generated by the trust while leaving the assets in trust for grantor’s grandchildren.

Other entities: Separating assets by gift now would be important if you wanted to ensure some minimum funding for children, such as guaranteeing coverage for their college expenses.

529 Plans: you can use 529 plans or trusts for gifting to cover college costs of a child.

After the Plan has been Executed

Ownership and Beneficiary Designations

Once the documents and insurance are in place, make sure to review and complete the following:

Qualified Plans (IRA’s, 401k plans, etc.):

Primary Beneficiary – to the surviving spouse (so he or she can roll over the proceeds to an IRA and thereby defer income taxes); and

Secondary Beneficiary – to your children (or your own revocable, depending on whether you want the assets controlled or available to children).

Life Insurance and Annuities:

Primary Beneficiary – when not owned by an irrevocable trust, such as group term, to your own revocable trust (for estate tax benefits, e.g., using credit at first death); and

Secondary Beneficiary – to the surviving spouse (in case of trust has been terminated for some reason).

Other Assets

Consider changing ownership of any jointly held assets to ownership by one of you. Any assets held as joint tenants with rights of survivorship will go to the survivor by operation of law and never get to your revocable trust. (You want to be sure that you have sufficient assets going to the trust to realize the full tax reduction effect.)

You may even want to fund your trusts, moving investment accounts over to your own revocable trust. This has no impact on your income taxes.

You can also choose to fund your revocable trust now. This will save a significant amount of time for the executor, and the attorney he or she hires, as this will need to be done after your death otherwise.
Memorandum to Survivors

Compile a reference book or add to your financial plan book photocopies of important papers, identifying where the originals are, then adding a list of important contacts, instructions to your executor and trustee and other important notes for family and friends. You would update this at least annually with new asset statements (consider this as you gather information for preparing your taxes). To be more specific, the list (and copies) should include:

Location of original will, trust, etc.;

Location of health care proxy and durable power of attorney;

List of professionals with contact information: doctor, attorney, CPA, etc.;

List of fiduciaries with contact information: health care proxy, guardians, executors and trustees, attorney-in-fact for durable power of attorney, etc.;

Location of insurance policies and valuables such as original titles, etc.;

Location of safe deposit box for valuables and items in #5 or 7;

List of all bank and investment accounts and location of any stock certificates or other documentation for investments;

List of all mortgages, loans and credit card accounts;

Any appraisals or other listing of items by value;

All automatic debits that need to be addressed (stopped, changed); and

List of all password protected accounts (e-mail, on line banking and credit cards, etc.) and where to locate the passwords… and the password to access the password.

Estate planning is a way of preparing properties and other items for a specific person and the people that are special to them. This involves organization of properties and possessions into a will. A real estate plan would significantly lessen the taxes of the properties that are included in the will. Also, planning a real estate would include preparations that would ensure that everything I the will would be granted.

A good plan would be able to coordinate home, investments, benefits, business and insurance matters for the future. This should be ensured that even if the person passes away or becomes ill. The plan would also be able to set the direction about the health care one would accept especially if they become disabled.

If you plan to go into planning your estate, you have to know first which items fall into the category. An estate comprises all of the properties and possessions that a person owns. It does not matter whether the estate is owned solely or with a partner. You can include real estate properties, cash, stocks, establishments, buildings, collections, jewelry and businesses. You can even include your retirement benefits.

Who should get a real estate plan trust? Generally, parents who have children who are still minors or those who have large properties should get an estate plan. Also, if you are doubtful about your health and want to ensure that your properties would go to the right people, then you would get a lot of advantages when you ensure your properties through an estate plan.

If you are planning on getting an estate plan trust, then it is best to start looking at your options. You can ask your family and friends for recommendations, especially about the lawyers that would help you go through the whole process. There would be a contract that you would have to sign. It is best to study it well before you sign it.

This article is written by Debra Trotter. She is an article writer fo