Estate Planning Lessons

Planned Giving

Lesson Four: Trusts for Family Security

A QTIP trust permits a husband or wife to provide significant financial security to a surviving spouse, qualify for the 100% estate tax marital deduction, and direct who will receive the trust assets when the surviving spouse dies.  These arrangements are often used where one or both spouses have children from prior marriages.

An irrevocable life insurance trust (sometimes called a Crummey trust) can pass life insurance proceeds to heirs, or help provide for estate liquidity, without being subject to federal estate tax or gift tax.

A bypass, or credit shelter, trust (sometimes referred to as a “B” trust) permits you to leave significant benefits to a spouse or other beneficiary without having the trust assets taxed at the beneficiary’s death.  Bypass trusts may be sheltered from estate tax at your death by your estate tax credit (currently $11.2 million of exemption), and permit married couples to take full advantage of both the credit and the marital deduction. Note: Spouses can "inherit" any unused exemption of the first spouse to die, without need for a credit shelter trust, sheltering up to $22.4 million.

What Is Probate? Can You Avoid It?
Probate is the word used to describe the administration of a person’s estate, which includes determining whether a valid will exists. The settlement of an estate can be a long, complex and sometimes expensive procedure.  Each state has its own highly technical probate procedure, but the procedures usually follow this common pattern:

• When a person dies, his or her last will must be found and filed before an officer of the court with a petition to admit the will to probate.

• The court must hold a hearing to determine the validity of the will, after serving notice to all persons who might want to contest the will.

• If the will is admitted to probate, the court must appoint an executor – generally the person nominated in the will – or appoint an administrator if the will does not name an executor.

• Notice to creditors must be filed within a short time after the appointment of the executor.  This notice establishes an absolute deadline for presenting claims against the estate.

• The executor must collect, manage and safeguard all of the estate’s assets, including an initial inventory and appraisal of the estate assets, normally filed within 60 days of his or her appointment.

• Claims against the estate must be settled.  These debts, if not unusual, are generally paid by the executor; some claims, if doubtful, will be set for hearing by the probate court.

• Taxes must be paid, including federal estate taxes, state death taxes, income taxes on income earned by the estate and the decedent’s final income tax.

• Finally, the court must interpret the will, supervise distribution of all testamentary gifts and pass upon a final accounting filed by the executor.

All of these sometimes lengthy and formal procedures are intended as a means of preventing fraud and of safeguarding and accomplishing, after your death, those personal objectives that you expressed in your will.

Charitable Remainder Trusts
Rather than make a bequest to a worthwhile organization, you may find it extremely advantageous to create a charitable remainder trust under which you will be paid annual benefits for life;  the trust property will later benefit your favorite causes.

Just what is a charitable remainder trust?  Basically, it is a trust in which you irrevocably place cash, securities or other property, but keep a specified income – usually for life.  When the trust ends, the property in the trust passes to a qualified organization, much as if you had left it in your will.  But because you chose to “accelerate” your bequest by means of a trust, Congress says you are entitled to a substantial income tax charitable deduction.  Depending on how you arrange your trust, many other advantages are possible:

• Increased income for your family
• Capital gains tax avoidance
• Favorably taxed income
• Deferral of income to a family member in a low tax bracket
• Estate tax savings
• Avoidance of gift tax
• Professional investment of your funds
• A hedge against inflation
• Reduced estate settlement costs
• Meaningful support for organizations

The Annuity Trust and the Unitrust
Charitable remainder trusts come in two varieties:  annuity trusts and unitrusts.  Both trusts provide for payments to one or more people for life or for a period of years, with principal ultimately passing to one or more qualified organizations.

The annuity trust must provide that a fixed dollar amount equal to at least 5% of the value of the property you place in trust be paid annually to the income beneficiary you designate.

The unitrust, instead of paying a specific dollar amount to the income beneficiary, provides that a specific percentage (minimum 5%) of the value of the property in trust be paid annually.  If the value of the trust increases, the payout will increase, too.  Decreases are also possible.

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