Girls, Girls, Girls...Just Kidding, More Trusts

Last week’s Blog broached the subject of trusts; explaining what they are and how they function. We also looked at different marital trusts. This week we will cover the wonderful world of Trusts! Yep more trusts.

You may be asking yourself why focus on trusts. For starters, it has been my experience that, on average, people really don’t know a whole lot about trusts. And while its true some trusts will not serve you well if you have a modest estate, there are some that are perfectly suited to a modest estate. And it is important to know what they are and how they operate. I've been approached by people who never thought they'd need an estate plan, let alone a trust fund; and then they received a large settlement from a lawsuit, or got married, or took a job position with a substantial pay increase. Below we cover this versatile estate planning tool a bit more. 

Noteworthy Tidbits

• The 2014 Estate Tax Exclusion amount is $5.34 million for individuals and $10.68 million for married couples
• Estates over $5.34million will be taxed at a top rate of 40%
• Federal estate tax law says the when a spouse dies; the unused estate tax exclusion will transfer to the surviving spouse. This concept is called “Portability”. The surviving spouse is able to add the deceased spouse’s unused tax exclusion to his or her own federal estate tax exclusion.
• Portability provides that the deceased spouse’s unused exclusion will roll over to the surviving spouse so long as the surviving spouse makes an affirmative election on the deceased spouse’s federal estate tax return using IRS Form 706 to claim it within nine months following the deceased spouse's death.

• If the deceased spouse does not use any of their available federal tax credit, then the surviving spouse is left with a federal estate tax credit in the amount of $10.68 million
• Arizona does not have a state estate tax so the federal estate tax amount will be the applicable exclusion amount for cases in Arizona.
• Portability does not provide creditor protection

Bypass or “B” Trust also known as Credit Shelter Trust 

A Credit Shelter Trust is a revocable trust designed to shelter the estate from federal estate taxes. This trust doubles the amount of tax credit if you are married, very similar to the concept of Portability, however at the death of the second spouse's assets can pass to beneficiaries tax free and with protection from creditors. This trust plan generally splits a marital estate in half between the couple, keeping the trust funded with an amount lower than the federal exemption amount. When the first spouse passes, the second spouse will be supported from the trust's funds, at the discretion of the trustee. The second spouse is able to forgo taxation on her estate because she does not control the principal assets of the trust established by the first spouse. She is able to enjoy use of the assets but the trustee’s role in controlling distributions renders the estate safe from taxation because it is technically outside of the surviving spouse’s estate.

Pros

• Protects estates that may surpass the tax deduction limit from a 40% tax rate.
• Protects assets from creditors
• Protects assets inherited by marital children should surviving spouse remarry

Cons

• This method is generally of less use to a moderate estate because portability allows assets under $5.34 million to pass to a spouse tax free. But it does provide creditor protection to beneficiaries.

Noteworthy Tidbit

These type of trusts are usually used in conjunction with an A trust ("A" Trust explanation here)

Testamentary Trust

A Testamentary Trust is created at the death of the testator. It is created by operation of the testator’s will.

Pros

• Covers items accumulated during the life of the testator. Very useful to address those assets brought into the estate as a result of the testators death. For example, the estate sues and wins on the deceased testator’s behalf for a wrongful death claim. Proceeds from a settlement may be kept in a testamentary Trust.
• Is a good choice for a person with a very small estate that stands to make a large gain at death (usually through large life insurance proceeds). Particularly helpful if the deceased has young children who stand to inherit before reaching adulthood.
• Can be cheaper than most kinds of trusts.

Cons

• A Testamentary Trust still has to go through probate. The trust is created as a result of the Will going through the process of probate.
• Assets are not immediately available to beneficiaries.
• Assets are subject to taxes.
• Still must pay for the cost of probate.

Living Trust Also called an Intervivos Trust.

“Inter vivos” is Latin for “among the living". This definition defines the nature of this trust, which is created during the settlor’s lifetime and takes effect at the time of execution of the document. During the settlor’s lifetime the trust is completely revocable and amendable, but becomes irrevocable (unchangeable) on the death of the settlor. A settlor will usually name himself the trustee during his lifetime, with a named successor trustee who will be responsible for trust distributions and responsibilities at the death of the settlor.

Pros

•  Estate will avoid probate, unlike the testamentary trust. One of the most alluring features of a trust is the fact that the trust assets bypass the probate process which can be costly and lengthy.
• Truly preventative measure in the case where incapacity is an issue.
• Seamless transition of power over the trust from grantor/trustee to the successor trustee upon death or incapacity of the grantor/trustee. 
• Beneficiaries have immediate access to the trust income because the trust assets do not have to go through probate.
• The details of the trust remain private, whereas the details of a will are accessible by the public. 

Cons

• Some property is best left outside of the trust, but this will depend on what your estate planning goals are.

            For example- Ordinarily a life insurance policy with a named beneficiary is generally best held outside of the trust because life insurance policies are paid out almost immediately after the death of the insured party. So it is usually best to let Life Insurance policies pass outside of a trust.

            However, if your estate-planning goal is to pass the proceeds from your life insurance policy to a minor grandchild, it may be a good idea to name the trust as the beneficiary of the life insurance policy with your grandchild named as beneficiary of the trust with a designated age or event to trigger disbursement.

• A living trust does not insulate the trust assets from creditors while the grantor is still alive. He still has the power to revoke the trust and stills controls the assets. Creditor protection doesn't kick in until the grantor passes and the trust becomes irrevocable.
• Income earned by the trust is taxable and is the personal tax responsibility of the grantor.

Noteworthy Tidbit

- The Average (uncontested) probate case can take about six months to a year and start at $3000 (not including filing fees and other costs).

- While the estate is being probated the executor is prohibited from distributing the estate property. 

Qualified Domestic Trust (QDT- called a Q-dot)

A Qualified Domestic Trust allows a spouse who is not a U.S. citizen the ability to take advantage of the marital tax deduction that is otherwise granted to married couples.

Pros

•  The only way for couples consisting of one non-us citizen to still take advantage of the marital deduction.

Cons

• At least one trustee of the QDT must be a U.S. citizen. This may include a U.S. corporation.
• Only awarded to surviving spouses whose spouse died after November 10, 1988.

Irrevocable Life Insurance Trust also called an ILIT

 An ILIT is a trust that is funded with the proceeds of a life insurance policy. The trust is named as the beneficiary of the policy and owner of the policy, and precludes taxation even after the death of the second spouse. In the previous post, we noted that the common factor in all of the marital trusts was that the trusts provided a delay on taxation until the death of the second spouse. Unlike a marital trust, the ILIT assets are not included in the estate of the second spouse. 

 Pros

• Ordinarily the proceeds of a Life insurance policy is included in the estate of the owner of the policy and will be included in the owners estate at death. So your estate will be taxed at a rate that includes the life insurance. 
• Ex. If you own a $2 million dollar life insurance policy, at your death the estate taxes will be assessed considering the $2 million dollars a part of the estate. This will eat into your $5.23 million estate tax exemption.
• If your estate planning goals are to provide for your children and grandchildren, and ILIT can be set up as a Generation Skipping Trust (Dynasty Trust).

 Cons

• This is not ideal for families who need liquid assets( ie a family who is reliant on access to the life insurance policy proceeds).
• This is one of the types of trusts that should only be used if the family is substantially flushed with liquid asset, (ie this is one for the rich folks or very, very good savers).
• The insured person must give up control over the insurance policy; he may not act as trustee of the trust. 
• This type of trust is irrevocable.

Generation Skipping Trust or a Dynasty Trust

As the name implies a Generation Skipping Trust (GST) is a trust where the assets are transferred in trust to the testator’s grandchildren, hence it "skips" a generation.

Pros

• The assets are not subjected to estate taxes. The assets would be taxed would be if the assets were in trust for the settlor’s children.
• Helpful if you want to provide for grandchildren whose parents are financially irresponsible.
• Insulates assets from children’s and grandchildren’s creditors and or a divorced spouse
• An individual may give Grandchildren up to $5.34 million without transfer taxation.
• The settlor’s children do have access to the income generated by the assets. 
• Ex. If an asset is rental property or stock that produces dividends, the grantor's children may access the profits from the rent and the dividends.

Cons

• May not be advantageous where the assets do not generate income the children of the testator may not receive financial benefits.
• May not be advantageous in very modest estates that will automatically avoid the Generation Skipping Tax consequences.

Next week we will cover Charitable Trusts. If there is a term or explanation in this post that is still unclear please ask for clarification by posting your inquiry in the comments section or emailing us at Info@KeovonneWilsonLegal.com

Keo'vonne W.

"Turn Your Dream Into Your Legacy"

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You're Gonna Need a Bigger Tool Box

When most people think of trusts they often times think of a gilded estate-planning tool for the ultra wealthy, but a trust can be a great way of protecting the assets of the average person. This week we’ll discuss, what can be the most useful estate-planning tactic in your toolbox.

To keep the discussion stream lined this week will cover trust basics and the three kinds of Marital Trusts.

What is a Trust and how does it work?

A trust is a legal arrangement in which a person (can be more than one person or a business entity) entrusts a third party with power (and/or property) for some determined time for the benefit of another person or parties.

- The person who creates the trust by giving away the power or property to the third party is the settlor/Trustor/grantor.

- The third party with whom the power or property is entrusted is called the trustee.

- The person the trustee is holding power or property for, is the beneficiary.

Ex. John (settlor) designates Martha as trustee of his estate, until John’s daughter Sara (beneficiary) reaches the age of 21.

A trust documents the designation of power and property and names the beneficiaries. The trust document must reflect a clear intention of the settlor to create a trust, the property that is the subject of the trust must be clearly identified, and the beneficiaries must be identifiable.

Revocable vs. Irrevocable

What is the difference between a Revocable Trust and an Irrevocable Trust?

A Revocable trust may be revoked (changed or terminated) at any time during the life of the person who created the trust, ie the settlor. A revocable trust becomes irrevocable when the Trustor passes away.

            - Assets held in a revocable trust are still subject to creditors because the settlor still has access and control over the assets.

An Irrevocable trust may not be revoked (changed or terminated) at any time after it is created.

            - Assets held in an irrevocable trust are insulated from creditors because the settlor no longer has power over the assets. Assets held in an irrevocable trust are considered property of the trust.

Marital Trusts

No that we've covered what a Trust is, how it functions; and defined revocable and irrevocable, we will take a trip into the wonderful world of Marital Trusts.

As the name implies, a Marital Trust, aka an “A Trust” is established for the benefit of a settlor’s spouse and their children. There are three types of Marital Trusts: 1) Qualified Terminable Interest Property (QTIP) Trust, 2) Power Of Appointment Trust, 3) The Estate Trust.

It is critical to note that All U.S. residents can use the Unlimited Marital Deduction, which allows for property to be transferred to a spouse before or after death. The spouse must be a U.S. citizen in order to take advantage of this deduction.

At the first death assets are passed tax-free to the second spouse, then to the children at the death of the second spouse. The second transfer, the one made to the children of the marital couple, is subject to tax if there is not a Tax Credit Trust aka a “B Trust” set up. In general these trusts will operate together to maximize savings.

Pros

-Makes sure that the marital children inherit even if the surviving spouse remarries. Ordinarily the new spouse would be able to lay claim to the estate according to state statute.

- Great way for married couples to take advantage of tax breaks. 

Cons

- Must be used in conjunction with a “B Trust” to minimize taxation at the second spouse’s death.

Noteworthy Tidbit:

If the surviving spouse is not a U.S. citizen, he will inherit subject to all permissible estate and transfer taxes after the first $145,000. A well-drafted Qualified Domestic Trust aka “QDOT” will qualify for the marital tax deduction and can insulate a large portion of the assets used for the the benefit of a non-US citizen. (QDOTs will be explained in another post- but you should know that they exist)

1) Qualified Terminable Interest Property (QTIP) Trust-

Creates a life-long interest in the asset of the trust in the second spouse, but prevents him from passing the money on to subsequent spouse. Normally a settlor may not take advantage of the unlimited marital tax deduction if the surviving spouse is able to lose an interest in the property.

For example, if wife leaves her husband a property that belongs to him so long as he doesn’t get married. Whether or not he gets married is not relevant, but rather the fact that the act of getting married can cut off his interest in the property according to the terms of the wife’s trust. Wife would not be able to take advantage of the tax deduction in order to avoid taxation on the property. However the husband’s interest will be qualified for the tax deduction is wife grants him a life estate. That is he owns the home until he dies. When husband dies, his life estate ends and then the home becomes property of the estate and subject to the terms of the trust that give the home to the children rather than new wife.

Pros

-Gives the settlor power to prevent the estate assets from going to a new spouse.

                 -- The settlor can grant the surviving spouse some                                  power to alter distributions.

-Delays taxation until the death of the second spouse.

-Also may be used to ensure that children of the second marriage are provided for from the marital assets of the second marriage.

Cons

- Taxation at second death

- Limits the surviving spouse's power to name new beneficiaries or exclude existing beneficiaries.

2) Power Of Appointment Trust

This trust is similar to the QTIP trust because it gives the surviving spouse a life interest, that is the right to use the assets during her lifetime and then whatever assets remain at the death of the surviving spouse, are distributed. However, the key difference here is that the surviving spouse has the general power of appointment and may alter the distributions made at their death.

Pros

-Ultimately gives surviving spouse power over final distributions of the assets.

- Most liberal grant of power to the surviving spouse when comparing marital trusts. 

Cons

- Marital assets could end up in the hands of a new spouse.

 3) (Marital) Estate Trust

Does not necessarily give the surviving spouse rights to the entire marital estate during lifetime. It is usually used to make discretionary distributions to the surviving spouse. Discretionary distributions are distributions made at the discretion of the trustee (usually not the surviving spouse). This can be the most restrictive type of marital trust. Even if all of the assets are not available to the surviving spouse during her lifetime, any assets that remain in the marital trust must become the property of the surviving spouse’s estate. This is different from the QTIP trust, which prevented the remaining marital assets from becoming a part of the surviving spouse’s estate and instead streamed them directly to the marital children.

Pros

Can be used to provide for a spouse with a gambling or drug problem. Ensures the spouse will be taken care of but not use the trust assets recklessly.

Cons

Can be very restrictive.

Noteworthy Tidbits

Used alone, Martial Trusts do not completely eliminate taxes, but rather delay when the estate is taxed. This is desirable if the first spouse to pass is the primary breadwinner, the surviving spouse gets to enjoy the assets of the estate free from taxes. Taxes are levied against the estate when the second spouse dies and has little impact on the quality of life of the surviving spouse.

Marital Trusts are typically set up in conjunction with a B Trust also called a Tax Credit Trust, which we will discuss next week.

 The subject of Trusts is a vast but we will tackle a variety of trusts that can exist outside of a marital estate next week.   If there is a term or explanation in this post that is still unclear please ask for clarification by posting your inquiry in the comments section or emailing us at Info@KeovonneWilsonLegal.com

Keo'vonne W.

"Turn Your Dream Into Your Legacy"

The Who's Who of Estate Planning

When I lived in Brooklyn, I would wander down to a nearby park to play chess. The well worn tables were usually occupied by some of the most incredible chess players I'd ever met.  I was beat several times by a 14 year old chess master, but every time I played I became better at protecting my King.  This is a lesson that is useful in estate planning and thankfully I'm a better lawyer than I am a chess player. Let's imagine that the people involved in your estate plan are your chess pieces. They each have a particular duty, power or role. For the most part, their purpose is to defend your assets, ie your King. While the king himself isn't a powerful player, he is the reason all the other pieces are on the board; this is essentially how your assets function. 

In the world of estate planning, as in the game of chess, there are quite a few moving pieces. And as with chess, you can not protect your most valuable assets unless you know who's who and how they function. 

Testator

The testator is a person who makes a will. A woman who makes a will may be referred to as a testatrix.

 

Beneficiary

 When used in reference to estate planning, a beneficiary is someone who receives money, property, profits, and other property as a result of a trust, will, life insurance policy , or other method of gift giving.

            The following terms are sometimes used to distinguish between types of beneficiary.

            Devisees are the beneficiaries of a will who receive real property ( home, office building, apartment complex,  other forms of real estate)

            Legatees are the beneficiaries will who receive personal property ( jewelry, art, collections)

Noteworthy Tidbit

-The terms beneficiary is generally adequate and covers all types of gifts. 
-Personal property is generally anything that you can move around or hold.
  

Trustor – also called Grantor, Settlor, or Donor

 A Trustor is the person or organization that creates a Trust by setting sets aside gifts of funds, property and other assets for others (beneficiaries). They plainly express their intention designate someone (sometimes themselves) to maintain the assets until a designated time or event in which the assets will be dispersed to the beneficiaries.The Trustor may serve as trustee.

 

Trustee

  A trustee is the person that holds, manages, and or maintains the property held in a trust for the benefit of the Beneficiaries. She has the duty to distribute the property at a predetermined time or event. As the name indicates the trustee should be someone who is trustworthy and have the ability to manage the trust assets. A trustee owes a duty of loyalty to the Beneficiaries of the trust, which means she must act in the best interest of the beneficiaries at all times.

The Trustor may serve as trustee of the assets until she dies or at some predetermined date or event.

 

A successor trustee becomes trustee if the originally named trustee is unable to serve as the trustee. A trustee may be unable to serve due to incapacity, death, or unwillingness to serve as trustee. A successor trustee is usually chosen by the settlor and named in the trust document.

Co- trustees exist when there is more than one trustee for the same trust.

 

Below is a list of rights and duties a trustee may have. This list is not a complete list of duties and a Trustor may limit and designate more narrow or broad duties.

- Invest the trust assets

- Sell trust property

- Keep an accurate accounting of the trust assets

- Bring a lawsuit on behalf of the trust

- Defend the trust in a legal suit

- Distribute trust assets to beneficiaries

- Must remain unbiased when dealing with beneficiaries.

- May not use the trust assets for his own benefit (Even if he is a named beneficiary of the trust, he still has a duty to act in the best interest of all of the beneficiaries and must do so impartially. He may be removed by legal action if found to be acting in a way that             is not loyal to the trust beneficiaries)

 

Executor (also known as a Personal Representative)

 The executor is the person who wraps up the affairs of the deceased testator (will maker). He is designated in the Will and usually is tasked with submitting the will for probate. The executor is obligated to act to satisfy the testators wishes as spelled out in the will. She is also responsible for paying any remaining debts and taxes on the behalf of the testator. An executor must be over the age of 18 years old.

 

Administrator (also may be known as a Personal Preventative)

An administrator acts in the same way as an Executor but represents the interests of someone who dies without a will. She is usually a spouse or trusted family member of the person who has died. She may be appointed by the court in the case where there is no clear designation or where a named executor refuses to serve.

 

Guardian

A guardian serves as a sort of trustee, but rather than manage assets, he manages people. A guardian is responsible for the well being and care of a person. A guardian is usually chosen and named in a will document when the testator has minor children, but a guardian may care for an adult who is incapacitated. He may also petition for guardianship. If a guardian is not chosen in a will or estate document, a judge may appoint one.

 

Ward

 The ward is the person the guardian is caring for.

 

Conservator

 A conservator is appointed by the court to manage the financial affairs of an underage child or an incapacitated adult. The conservator may be the same person serving as the guardian.

 

Protected person

The protected person is the person whose estate the conservator has legal power over.

 

 Noteworthy Tidbit

- What’s the Difference? The Guardian has power over the person; the Conservator has power over the estate of the protected person.

 

- A Guardianship or Conservatorship may be ended if the ward/protected person can show to the court that they no longer need the protection and care of the guardian or conservator.

 

 

Trust Protector

 The trust protector is an uninterested third party, usually an attorney, financial advisor or bank, that makes sure that the trust is being taken care of the way the Trustor intended. He is usually not called to duty until someone, usually a disgruntled beneficiary, calls the Trustee’s behavior into question. The trust protector may remove a Trustee who is violating his duty of loyalty and replace him or act as Trustee until she finds a suitable successor trustee. Trust protectors are usually entitled to payment.

 

Next week's article will cover trusts. If there is a term or explanation in this post that is still unclear please ask for clarification by posting your inquiry in the comments section or emailing us at Info@KeovonneWilsonLegal.com

Keo'vonne W.

"Turn Your Dream Into Your Legacy"