Trusts
A trust is a legal entity that has a Grantor, also called Trustor or Settlor (one who creates a trust), Beneficiaries (those for whom the trust was created and who will benefit from the trust property), and a Trustee (one who manages and administers the property of the trust for the benefit of the Beneficiaries). A Trust is an excellent estate planning tool. By placing property in a Trust, the Grantor can control when property will be distributed, to whom, and upon what conditions, how the property, including income, is to be used, and for what purposes. The Trustee may be given broad discretion over the distribution of the Trust’s income and principal in order to provide greater benefits to designated beneficiaries.
A Trust is often used as an alternative to the outright distribution of assets to children. A Trust can be structured to provide flexible management for Beneficiaries who are either too young or incapable of managing property. By giving the Trustee broad discretionary powers, the needs as well as the financial maturity, of the Beneficiaries can be considered in making distributions of Trust Income and Principal. A Trust may also be a worthwhile receptacle for life insurance and retirement benefits. Property placed in a Trust during your lifetime will not be subjected to a probate proceeding.
SIDEBAR: Remember...”Where there’s a Will there’s a Probate!” The Will is designed to be Probated. The Living Trust avoids Probate, Joint Ownership and Guardianship, and reduces or eliminates Estate taxes in many cases!
A Trust is often used as an alternative to the outright distribution of assets to children. A Trust can be structured to provide flexible management for Beneficiaries who are either too young or incapable of managing property. By giving the Trustee broad discretionary powers, the needs as well as the financial maturity, of the Beneficiaries can be considered in making distributions of Trust Income and Principal. A Trust may also be a worthwhile receptacle for life insurance and retirement benefits. Property placed in a Trust during your lifetime will not be subjected to a probate proceeding.
SIDEBAR: Remember...”Where there’s a Will there’s a Probate!” The Will is designed to be Probated. The Living Trust avoids Probate, Joint Ownership and Guardianship, and reduces or eliminates Estate taxes in many cases!
Revocable or Irrevocable:
The terms “revocable” and “irrevocable” address the ability of the Settlor of a trust to dissolve the trust and “take back” the assets that were gifted or transferred to the trust. A revocable trust allows the grantor to abolish or alter the trust at any time. The grantor thus controls the trust assets, but this arrangement normally provides no tax benefits. An irrevocable trust permits the Settlor few changes once the trust is created and is the favored type of trust used for asset protection.
A revocable trust is one in which the Settlor can change their mind, cancel the whole deal, and take back all assets conveyed into the trust. Additionally, if the trust were to be revoked and you took back the assets conveyed, you have gained nothing in avoiding probate. Even if you were to die before the trust expires, in some jurisdictions the value of the revocable trust assets can be placed in your estate for probate and tax considerations. Under federal statutes, the value of a revocable trust is placed in your estate for federal tax purposes. A revocable trust provides no protection to the estate or the person from future claims of liabilities.
Example: Someone sued you for no reason at all, but due to inexperience, lack of knowledge on your part, or perhaps even incompetent legal advice, they obtain a judgment against you personally. If you had set up a revocable trust, the judgment creditor could force you to revoke the trust allowing those trust assets to be seized to satisfy the judgment. The purpose of a trust is to preserve and protect your estate, a revocable trust will not do this. To maximize the benefits of a trust, it should be irrevocable.
An irrevocable trust is recommended because of several valid reasons. The main reason being, an irrevocable trust requires that the Settlor convey legal title of all assets to the trustee. Without ownership by title the conveyor has surrendered control. This is VERY important because without control of one's assets, the assets cannot be seized or judgements cannot be collected against you personally.
When a piece of property is conveyed into Trust, and the transfer is declared irrevocable, it is the same as if the property is sold except there is no tax consequence.
An Irrevocable Trust is typically used in conjunction with life insurance purposes. The advantage of the irrevocable Trust is that it keeps the proceeds from insurance policies out of both spouses’ estates for estate tax purposes. The insurance trust owns the insurance policy and pays the premiums with money that has been contributed to the trust and, upon the death of the Grantor, the insurance proceeds are then paid to the Trust. The proceeds are excluded from both spouses’ estates and no estate tax need be paid by either spouse when the proceeds are distributed.
If you have a large insurance policy or a large estate (in excess of $1,000,000), it makes sense to create an irrevocable Insurance Trust and designate the Trust as the owner and beneficiary of the insurance proceeds in order to avoid taxes. The Trustee of the irrevocable Trust may be an independent third person and cannot be the Grantor or a Beneficiary of the trust.
A revocable trust is one in which the Settlor can change their mind, cancel the whole deal, and take back all assets conveyed into the trust. Additionally, if the trust were to be revoked and you took back the assets conveyed, you have gained nothing in avoiding probate. Even if you were to die before the trust expires, in some jurisdictions the value of the revocable trust assets can be placed in your estate for probate and tax considerations. Under federal statutes, the value of a revocable trust is placed in your estate for federal tax purposes. A revocable trust provides no protection to the estate or the person from future claims of liabilities.
Example: Someone sued you for no reason at all, but due to inexperience, lack of knowledge on your part, or perhaps even incompetent legal advice, they obtain a judgment against you personally. If you had set up a revocable trust, the judgment creditor could force you to revoke the trust allowing those trust assets to be seized to satisfy the judgment. The purpose of a trust is to preserve and protect your estate, a revocable trust will not do this. To maximize the benefits of a trust, it should be irrevocable.
An irrevocable trust is recommended because of several valid reasons. The main reason being, an irrevocable trust requires that the Settlor convey legal title of all assets to the trustee. Without ownership by title the conveyor has surrendered control. This is VERY important because without control of one's assets, the assets cannot be seized or judgements cannot be collected against you personally.
When a piece of property is conveyed into Trust, and the transfer is declared irrevocable, it is the same as if the property is sold except there is no tax consequence.
An Irrevocable Trust is typically used in conjunction with life insurance purposes. The advantage of the irrevocable Trust is that it keeps the proceeds from insurance policies out of both spouses’ estates for estate tax purposes. The insurance trust owns the insurance policy and pays the premiums with money that has been contributed to the trust and, upon the death of the Grantor, the insurance proceeds are then paid to the Trust. The proceeds are excluded from both spouses’ estates and no estate tax need be paid by either spouse when the proceeds are distributed.
If you have a large insurance policy or a large estate (in excess of $1,000,000), it makes sense to create an irrevocable Insurance Trust and designate the Trust as the owner and beneficiary of the insurance proceeds in order to avoid taxes. The Trustee of the irrevocable Trust may be an independent third person and cannot be the Grantor or a Beneficiary of the trust.
Complex Trusts:
The Complex Trust is one of the most unique and effective estate planning entities ever devised. It is unique in that it is a privilege guaranteed by the Constitution of the United States. It is not governed by local or state law since it is first of all a Contract and your right to enter into a Contract is guaranteed in Article 1 section 10 of the Constitution and cannot be abridged by any state.
SIDEBAR: A Contract is the process of entering into an agreement with another individual or entity to a specified future result, which you anticipate, will be to your advantage. This ability to Contract can be used to your advantage in protecting your assets from liability, exorbitant taxation and other estate planning concerns.
The Complex Trust has been in successful use for centuries by wealthy people to protect and preserve their assets. Trusts in America go back to early colonial days before the formation of the United States.
One of the first trusts was the Virginia Land Company in 1709. Patrick Henry set up the “Robert Morris Family Trust” in 1765 to protect their property from English taxes and laws. This Complex Trust is still operating today as the “North American Land and Cattle Company” of Chicago. It is today as viable, legal, and useful as it was then.
Some of the best-known people in the World have used the Complex Trust to manage their fortunes; the Kennedy’s and the Rockefeller’s to name two. Politicians often use the Complex Trust to hold assets in matters where there is a possible conflict of interest. The largest stock fund in America, the Fidelity Magellan Fund is a Complex Trust and so is Lloyd's of London, American Express, and the “Subway” sandwich chain. Patrick Henry established one for the Governor of Virginia some 200 years ago.
There are four essential elements to a Complex Trust:
SIDEBAR: A Contract is the process of entering into an agreement with another individual or entity to a specified future result, which you anticipate, will be to your advantage. This ability to Contract can be used to your advantage in protecting your assets from liability, exorbitant taxation and other estate planning concerns.
The Complex Trust has been in successful use for centuries by wealthy people to protect and preserve their assets. Trusts in America go back to early colonial days before the formation of the United States.
One of the first trusts was the Virginia Land Company in 1709. Patrick Henry set up the “Robert Morris Family Trust” in 1765 to protect their property from English taxes and laws. This Complex Trust is still operating today as the “North American Land and Cattle Company” of Chicago. It is today as viable, legal, and useful as it was then.
Some of the best-known people in the World have used the Complex Trust to manage their fortunes; the Kennedy’s and the Rockefeller’s to name two. Politicians often use the Complex Trust to hold assets in matters where there is a possible conflict of interest. The largest stock fund in America, the Fidelity Magellan Fund is a Complex Trust and so is Lloyd's of London, American Express, and the “Subway” sandwich chain. Patrick Henry established one for the Governor of Virginia some 200 years ago.
There are four essential elements to a Complex Trust:
- You, the Trustor, who originates the trust for the economic benefit of your beneficiaries,
- Your estate property, also called the Trust Corpus or Res,
- The Trustees, whom you choose to administer your estate for the economic benefit of your beneficiaries, and
- The beneficiaries, whom you designate as recipients of your estate, should there be a distribution of assets. That normally is you while you are living.
Dynasty and Wealth Replacement Trusts:
A Dynasty trust is basically a variation of the Wealth Replacement Trust in that it is an irrevocable life insurance trust with a twist -- it is primarily designed to bypass the next generation (i.e. your children) and provide for significant moneys for your grandchildren.
Like a Wealth Replacement Trust, gifts made to the Dynasty Trust ordinarily qualify for the annual $10,000 gift tax exclusion for each beneficiary. There is still a requirement that each beneficiary has the right to withdraw his or her pro rata share of the annual gifts made to the Trust (i.e. the "CRUMMEY" withdrawal right).
In a similar fashion, gifts in excess of $5,000 per donor per beneficiary may create adverse tax implications for the beneficiary, if said beneficiary should decline to exercise his or her annual right to withdraw these sums. Therefore, if sums aggregating in excess of $5,000 are needed to provide for required Trust expenditures, it may be necessary for someone other than you to make additional contributions to this Trust.
However, because the primary purpose of the Dynasty Trust is to provide for grandchildren, the tax laws provide for a "Generation-Skipping Tax" for gifts made to a "skipped" generation such as grandchildren. In order to exempt these gifts from the Federal Generation-Skipping Tax those amounts contributed to the Trust, it will be necessary for each contributor to elect to allocate to their contribution an amount of their Generation Skipping Tax exemption available pursuant to Section 2631 of the Internal Revenue Code of 1986 and as amended, in the same amount as their contribution. Such allocation is made on IRS Form 709 (the gift tax return). In general, there is a lifetime $1,000,000 Generation-Skipping Tax exclusion for each donor which can be used to exempt gifts to a "skipped" generation recipient such as a grandchild from the Generation Skipping Transfer Tax. This tax is the highest possible estate rate, or 55%.
Wealth Replacement Trusts (Life Insurance Trusts) are set up to provide financial security for loved ones. Traditionally, this means one or more beneficiaries on the policy to collect the insurance proceeds in a single payment. The beneficiary gets the money promptly without delay or expense of probate. However, with this arrangement, the value of these insurance proceeds will be considered part of your estate for federal estate tax purposes.
The federal estate tax is expensive. It starts at 37% and quickly goes up to 55%. So, without proper planning, from 37-55 % of every dollar over $675,000 will go to the government. Also, estate taxes must be paid in cash, usually within nine months after death. Many assets (especially real estate), must be liquidated just to pay estate taxes.
A Wealth Replacement Trust or Life Insurance Trust funded with life insurance removes the insurance proceeds from your estate for tax purposes. You therefore reduce or eliminate estate taxes so more of your estate can go to your loved ones. An Insurance trust also gives you more control over your policies and the money that is paid from them.
In Summary, an Insurance Trust:
Like a Wealth Replacement Trust, gifts made to the Dynasty Trust ordinarily qualify for the annual $10,000 gift tax exclusion for each beneficiary. There is still a requirement that each beneficiary has the right to withdraw his or her pro rata share of the annual gifts made to the Trust (i.e. the "CRUMMEY" withdrawal right).
In a similar fashion, gifts in excess of $5,000 per donor per beneficiary may create adverse tax implications for the beneficiary, if said beneficiary should decline to exercise his or her annual right to withdraw these sums. Therefore, if sums aggregating in excess of $5,000 are needed to provide for required Trust expenditures, it may be necessary for someone other than you to make additional contributions to this Trust.
However, because the primary purpose of the Dynasty Trust is to provide for grandchildren, the tax laws provide for a "Generation-Skipping Tax" for gifts made to a "skipped" generation such as grandchildren. In order to exempt these gifts from the Federal Generation-Skipping Tax those amounts contributed to the Trust, it will be necessary for each contributor to elect to allocate to their contribution an amount of their Generation Skipping Tax exemption available pursuant to Section 2631 of the Internal Revenue Code of 1986 and as amended, in the same amount as their contribution. Such allocation is made on IRS Form 709 (the gift tax return). In general, there is a lifetime $1,000,000 Generation-Skipping Tax exclusion for each donor which can be used to exempt gifts to a "skipped" generation recipient such as a grandchild from the Generation Skipping Transfer Tax. This tax is the highest possible estate rate, or 55%.
Wealth Replacement Trusts (Life Insurance Trusts) are set up to provide financial security for loved ones. Traditionally, this means one or more beneficiaries on the policy to collect the insurance proceeds in a single payment. The beneficiary gets the money promptly without delay or expense of probate. However, with this arrangement, the value of these insurance proceeds will be considered part of your estate for federal estate tax purposes.
The federal estate tax is expensive. It starts at 37% and quickly goes up to 55%. So, without proper planning, from 37-55 % of every dollar over $675,000 will go to the government. Also, estate taxes must be paid in cash, usually within nine months after death. Many assets (especially real estate), must be liquidated just to pay estate taxes.
A Wealth Replacement Trust or Life Insurance Trust funded with life insurance removes the insurance proceeds from your estate for tax purposes. You therefore reduce or eliminate estate taxes so more of your estate can go to your loved ones. An Insurance trust also gives you more control over your policies and the money that is paid from them.
In Summary, an Insurance Trust:
- Provides immediate cash to pay estate taxes and other expenses after death.
- Reduces estate taxes by removing insurance from your estate.
- Is an inexpensive way to pay estate taxes.
- Insurance proceeds avoid probate and are free from income and estate taxes.
- Gives you maximum control over insurance policy and how insurance proceeds are used.
- Can provide income to spouse without insurance proceeds being included in spouse's estate; and
- Prevents court from controlling insurance proceeds if beneficiary of trust is incapacitated.