Saturday, December 5, 2020
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In Trusts We Trust

With a net worth of just $100,000, your family may qualify for what can be an effective estate-planning tool – a trust. Trusts can be of great benefit to families with a significant portion of their net worth in a business – or in real estate, art and other similar assets.

Generally, trusts let you put conditions on the distribution of your assets to heirs. For example, you may stipulate that your children graduate college prior to receiving a portion of their inheritance. With a trust, you can also support a disabled family member without interfering with his or her government assistance.

Among the many other benefits of a trust is the fact that a trust can maximize estate tax exemptions, or minimize estate and gift taxes. It also lets your family avoid the cost and hassles of probate court, which can take up to 7% of the value of your estate. Plus, they can even offer some protection against creditors and lawsuits. However, assets that you want to put into the trust must be retitled in the name of the trust, but a “pour-over” will can cover any assets that are not retitled at the time of your death.

Establishing a trust can be costly depending on how complex it is – and then additional fees would be due for trust administration after you die.

There are several kinds of trusts, and which one is right for you depends on your family situation and your goals.

  • Irrevocable Life Insurance Trust – This trust removes your life insurance policy from your taxable estate, thereby helping to pay estate costs and give your heirs tax-free income. As the name implies, this kind of trust does come with restrictions – you cannot borrow from your policy or change its beneficiaries, and you must surrender your ownership rights to the policy. These trusts help in situations where your other assets won’t provide cash to your heirs – such as when most of your assets are tied into a family business.

  • Credit Shelter Trust – This kind of trust lets you distribute assets in value up to the estate tax exemption to your heirs, and then the remainder goes to your spouse tax free – and you can specify the timing of the distribution to children to be after your spouse dies. And because your spouse is also able to pass on his or her portion of your assets up to the estate tax exemption, you can essentially double your heirs’ tax benefits.

  • Qualified Terminable Interest Property Trust – If you have been remarried and have stepchildren, this trust can let you direct your assets to your current spouse and then your children after your spouse dies. This way, you can rest assured your estate will benefit your children without being divided among stepchildren.  Unlike a credit shelter trust, assets in this kind of trust can be subject to estate taxes when your spouse dies, so be sure to set up a credit shelter trust first.

  • Generation-skipping Trust – Because a generation-skipping trust transfers assets from the grantor’s estate to his grandchildren, the children of the grantor never take title to the assets. This allows the grantor to avoid estate taxes at the children’s level. The children can still benefit from any income generated by the trust assets while still leaving the assets in trust for his grandchildren. 

  • Qualified Personal Residence Trust – Give your home as a gift while maintaining control of it for a specified period of time – after which time you must either move out or pay fair-market rent to your beneficiary. The benefit of this trust is that the IRS will depreciate the value of your home over the course of the specified period of time of your trust – so even if your home will be worth more, your beneficiary will be taxed on a depreciated value. The trust is only valid, however, if you outlive it and pass on the residence as a gift while you are living.

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