Estate Trusts: Simple Concept, Complicated Execution
Perhaps one reason why so many people keep putting off estate planning, or even drafting wills, is that they don't realize how proper estate planning will do more than simply protect their assets for their survivors. Good estate planning will enable them to optimize the use of their assets during their own lifetimes, as well as protect their assets for the use of their surviving beneficiaries. Estate trusts are especially useful tools in estate planning, There is a commonly held misconception that only the very wealthy need concern themselves with things like estate trusts, but reality paints a very different picture. Any individual in the US who dies with more than $600,000 in total assets will have his or her estate subject to a Federal estate tax, which can be as high as 55%. And because that $600,000 will include not only bank accounts, stock portfolios, pensions, the family jewels, and any other personal items, but the family home as well, the chances of having a taxable estate are far greater than they may first seem. Estate trusts are designed to protect as many assets as possible from the taxman's reach.
Estate trusts are easy enough to understand. A trust is a document in which you agree to have an individual, trust company, or bank manage the assets you place in trust for your benefit, if you are one of the trust's beneficiaries, and for the benefit of anyone else whom you name as a beneficiary. The party managing the trust is called the trustee, and you may serve as the trustee of your trust if you so desire, with a successor trustee taking over after your death. Because your estate trust is a legal entity, its assets remain separate from your estate and will both be exempt from a lengthy and possible expansive probate process, and subject to much lower taxes. An estate planning expert will be able to advise you on how to minimize your estate taxes with estate trusts. Estate trusts can be revocable, meaning that you can change their terms at any time, just as you can change the terms of a simple will. The assets in a simple revocable trust will be exempt from probate, but will not automatically reduce estate taxes unless the trust is specifically designed to do so. AB living estate trusts, for example, allow each spouse to leave his or her property in trust to the other spouse for their lifetimes, and then to their surviving children. This sort of living trust will greatly reduce the amount of estate taxes the final beneficiaries must pay. Irrevocable estate trusts may not have their terms changed, and any assets placed in them will remain there. Any income accruing from the assets of irrevocable estate trusts will be taxed, but the tax can be lowered if the income from the trusts is distributed to its beneficiaries on a regular basis. Most people, however, don't like the idea of surrendering control of their assets during their lifetimes, so irrevocable estate trusts are often used as tools for life insurance planning. The irrevocable estate trust can be made the beneficiary of a life insurance policy, and the money paid into it on the trust grantor's death can be distributed according to the grantor's wishes. An irrevocable estate trust can also be used for things like the care of minor children, who are not allowed to inherit property. But there are very specific rules as to how an irrevocable trust can be funded if it is to be exempt from estate taxes, so be sure to consult with an estate planning expert to determine if one is right for you! |
