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Other Articles
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Trusts
Making Sense Out of Trusts
By Tony DiSorbo
Owner, DAS Associates
Many of you have probably heard of trusts used as an estate planning tool to help people distribute their assets as they intended upon their death. While the decision around estate planning is deeply personal, using the correct tools is extremely important – from wills, which have to go through probate, to trusts that do not have to go through probate. This article discusses several of the most common tools, all of which require professional advice from trusted financial professionals experienced in estate planning.
Revocable or Living Trusts
These trusts give fiduciary control over your assets to a trustee for your benefit or that of another beneficiary. As long as you are living, you are allowed to change or cancel a revocable trust but once you die, it automatically becomes irrevocable. Living trusts are usually used to avoid probate because, unlike property that passes by will, trust assets are distributed directly to heirs. It is also used as a way to maintain management of one’s financial affairs during a period of incapacity because someone else can immediately take charge when necessary. Please note that a revocable living trust does not minimize income, gift, or estate taxes and does not usually shelter trust assets from creditors.
Irrevocable Trusts
This type of trust is a legally enforceable arrangement that allows for the transfer of property to someone else (the trustee) who holds the property for the named beneficiaries. Once an irrevocable trust is established, the assets in it are no longer your own and changes cannot be made without the beneficiary’s consent. The appreciated assets in the trust are not subject to estate taxes and by creating the irrevocable trust, you have made a gift of everything you transfer to the trust and you may not have to pay federal gift tax. Another benefit to this trust is that if all of your assets are contained within a trust, probate may be avoided and your property disbursed without delay to your beneficiaries.
Supplemental- or Special-Needs Trusts
These trusts are typically set up to provide benefits for a disabled person throughout his or her life while maintaining his or her eligibility for government assistance. This occurs by not having assets pass directly to the beneficiary, but rather the trustee (who should NOT be the beneficiary) distributes the funds from the trust to pay for things that government programs will not cover. Some types of special needs trusts may be established for a parent or other individual over age 65 who wants to preserve eligibility for nursing home benefits under Medicaid. By restricting the beneficiary’s own direct access to the assets in the trust to such an extent that the assets are not considered legally available to the beneficiary, these trusts can protect Medicaid eligibility because assets in the trust are uncountable.
Insurance Trust
This is a kind of irrevocable trust that purchases a life insurance policy (or policies) for you, thus removing it from your (and your spouse’s) estate and from estate taxes but allowing you to maintain legal control over how the proceeds can be spent. Your beneficiaries will then receive the necessary funds (free of estate and income taxes) to pay whatever estate taxes may be due on the remainder of your estate. While a similar result can be obtained if you simply gift an insurance policy or give cash to purchase a policy directly to your children, many people prefer to use a trust to hold the policy if their children are too irresponsible or too young to hold the polices in their own names. This sort of trust should only be used when you expect to have a gross estate in excess of the estate tax applicable exclusion amount ($1.5 million in 2005). If the value of your estate is less than this amount, it may not be worth the trouble and expense to set it up.
Ethical Will
This is an essay or a letter that sets your thoughts and wishes down on paper about how you want your heirs to live. While it is not legally binding, it can help your heirs understand your intentions in dividing up your estate. According to www.ethicalwill.com, a website devoted to ethical wills created by Barry K. Baines, MD, a family physician and medical director of a home-based hospice program in Minnesota, writing an ethical will should be viewed as writing a love letter to your family. It can include spiritual and personal values, experience, loves, hopes and forgiveness.
If any of these trusts (or wills) sound like an ideal estate planning tool for you and your family, please seek professional assistance. Estate planning at times can get complex, and depending on your situation, you may need the service of more than one professional.
The author is a CLU and ChFC designee, a Registered Investment Advisor and registered representative of Jefferson Pilot Securities Corporation, member NASD, SIPC.
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