Professional Resource

  • I have a will. Why would I want a living trust?
    Contrary to what you've probably heard, a will may not be the best plan for you and your family. That's primarily because a will does not avoid probate when you die. A will must be validated by the probate court before it can be enforced.

    Also, because a will can only go into effect after you die, it provides no protection if you become physically or mentally incapacitated. So the court could easily take control of your assets before you die -- a concern of millions of older Americans and their families.

    Fortunately, there is a simple and proven alternative to a will -- the revocable living trust. It avoids probate, and lets you keep control of your assets while you are living -- even if you become incapacitated -- and after you die.
  • What is probate?
    Probate is the legal process through which the court sees that, when you die, your debts are paid and your assets are distributed according to your will. If you don't have a valid will, your assets are distributed according to state law.
  • What's so bad about probate?
    It can be expensive. Legal fees, executor fees and other costs must be paid before your assets can be fully distributed to your heirs. If you own property in other states, your family could face multiple probates, each one according to the laws in that state. These costs can vary widely; it would be a good idea to find out what they are now.

    It takes time, usually nine months to two years, but often longer. During part of this time, assets are usually frozen so an accurate inventory can be taken. Nothing can be distributed or sold without court and/or executor approval. If your family needs money to live on, they must request a living allowance, which may be denied.

    Your family has no privacy. Probate is a public process, so any "interested party" can see what you owned, whom you owed, who will receive your assets and when they will receive them. The process "invites" disgruntled heirs to contest your will and can expose your family to unscrupulous solicitors.

    Your family has no control. The probate process determines how much it will cost, how long it will take, and what information is made public.
  • Doesn't joint ownership avoid probate?
    Not really. Using joint ownership usually just postpones probate. With most jointly owned assets, when one owner dies, full ownership does transfer to the surviving owner without probate. But if that owner dies without adding a new joint owner, or if both owners die at the same time, the asset must be probated before it can go to the heirs.

    Watch out for other problems. When you add a co-owner, you lose control. Your chances of being named in a lawsuit and of losing the asset to a creditor are increased. There could be gift and/or income tax problems. And since a will does not control most jointly owned assets, you could disinherit your family.

    With some assets, especially real estate, all owners must sign to sell or refinance. So if a co-owner becomes incapacitated, you could find yourself with a new "co-owner" -- the court--even if the incapacitated owner is your spouse.
  • Why would the court get involved at incapacity?
    If you can't conduct business due to mental or physical incapacity (dementia, stroke, heart attack, etc.), only a court appointee can sign for you -- even if you have a will. (Remember, a will only goes into effect after you die.)

    Once the court gets involved, it usually stays involved until you recover or die and it, not your family, will control how your assets are used to care for you. This public, probate process can be expensive, embarrassing, time consuming and difficult to end. It does not replace probate at death, so your family may have to go through probate court twice!
  • Does a durable power of attorney prevent this?
    A durable power of attorney lets you name someone to manage your financial affairs if you are unable to do so. However, many financial institutions will not honor one unless it is on their form. And, if accepted, it may work too well, giving someone a "blank check" to do whatever he/she wants with your assets. It can be very effective when used with a living trust, but risky when used alone.
  • What is a living trust?
    A living trust is a legal document that, just like a will, contains your instructions for what you want to happen to your assets when you die. But, unlike a will, a living trust can avoid probate at death, control all of your assets, and prevent the court from controlling your assets if you become incapacitated.
  • How does a living trust avoid probate and prevent court control of assets at incapacity?
    When you set up a living trust, you transfer assets from your name to the name of your trust, which you control -- such as from "Bob and Sue Smith, husband and wife" to "Bob and Sue Smith, trustees under trust dated (month/day/year)."

    Legally you no longer own anything; everything now belongs to your trust. So there is nothing for the courts to control when you die or become incapacitated. The concept is simple, but this is what keeps you and your family out of the courts.
  • Do I lose control of the assets in my trust?
    Absolutely not. You keep full control. As trustee of your trust, you can do anything you could do before -- buy and sell assets, change or even cancel your trust. That's why it's called a revocable living trust. You even file the same tax returns. Nothing changes but the names on the titles.
  • Is it hard to transfer assets into my trust?
    No, and your attorney, trust officer, financial adviser and insurance agent can help. Typically, you will change titles on real estate, stocks, CDs, bank accounts, investments, insurance and other assets with titles. Most living trusts also include jewelry, clothes, art, furniture, and other assets that do not have titles.

    Some beneficiary designations (for example, insurance policies) should also be changed to your trust so the court can't control them if a beneficiary is incapacitated or no longer living when you die. (IRA, 401(k), etc. can be exceptions.)
  • Doesn't this take a lot of time?
    It will take some time -- but you can do it now, or you can pay the courts and attorneys to do it for you later. One of the benefits of a living trust is that all of your assets are brought together under one plan. Don't delay "funding" your trust; it can only protect assets that have been transferred into it.
  • Should I consider a corporate trustee?
    You may decide to be the trustee of your trust. However, some people select a corporate trustee (bank or trust company) to act as trustee or co-trustee now, especially if they don't have the time, ability or desire to manage their trusts, or if one or both spouses are ill. Corporate trustees are experienced investment managers, they are objective and reliable, and their fees are usually very reasonable.
  • If something happens to me, who has control?
    If you and your spouse are co-trustees, either can act and have instant control if one becomes incapacitated or dies. If something happens to both of you, or if you are the only trustee, the successor trustee you personally selected will step in. If a corporate trustee is already your trustee or co-trustee, they will continue to manage your trust for you.
  • What does a successor trustee do?
    If you become incapacitated, your successor trustee looks after your care and manages your financial affairs for as long as needed, using your assets to pay your expenses. If you recover, you resume control. When you die, your successor trustee pays your debts, files your tax returns and distributes your assets. All can be done quickly and privately, according to instructions in your trust, without court interference.
  • Who can be successor trustees?
    Successor trustees can be individuals (adult children, other relatives, or trusted friends) and/or a corporate trustee. If you choose an individual, you should also name some additional successors in case your first choice is unable to act.
  • Does my trust end when I die?
    Unlike a will, a trust doesn't have to die with you. Assets can stay in your trust, managed by the trustee you selected, until your beneficiaries reach the age(s) you want them to inherit. Your trust can continue longer to provide for a loved one with special needs, or to protect the assets from beneficiaries' creditors, spouses and future death taxes.
  • How can a living trust save on estate taxes?
    Your estate will have to pay federal estate taxes if its net value when you die is more than the "exempt" amount at that time. (Your state may also have its own death or inheritance tax.) If you are married, your living trust can include a provision that will let you and your spouse use both of your exemptions, saving a substantial amount of money for your loved ones.
  • Doesn't a trust in a will do the same thing?
    Not quite. A will can contain wording to create a testamentary trust to save estate taxes, care for minors, etc. But, because it's part of your will, this trust cannot go into effect until after you die and the will is probated. So it does not avoid probate and provides no protection at incapacity.
  • Is a living trust expensive?
    Not when compared to all of the costs of court interference at incapacity and death. How much you pay will depend primarily on your goals and what you want to accomplish.
  • How long does it take to get a living trust?
    It should only take a few weeks to prepare the legal documents after you make the basic decisions.
  • Should I have an attorney do my trust?
    Yes, but you need the right attorney. A local attorney who has considerable experience in living trusts and estate planning will be able to give you valuable guidance and peace of mind that your trust is prepared and funded properly.
  • If I have a living trust, do I still need a will?
    Yes, you need a "pour-over" will that acts as a safety net if you forget to transfer an asset to your trust. When you die, the will "catches" the forgotten asset and sends it into your trust. The asset may have to go through probate first, but it can then be distributed as part of your overall living trust plan. Also, if you have minor children, a guardian will need to be named in the will.
  • Is a "living will" the same as a living trust?
    No. A living trust is for financial affairs. A living will is for medical affairs; it lets others know how you feel about life support in terminal situations.
  • Are living trusts new?
    No, they've been used successfully for hundreds of years.
  • Who should have a living trust?
    Age, marital status and wealth don't really matter. If you own titled assets and want your loved ones (spouse, children or parents) to avoid court interference at your death or incapacity, you should probably have a living trust. You may also want to encourage other family members to have one so you won't have to deal with the courts at their incapacity or death.
  • Summary of Living Trust Benefits
    • Avoids probate at death, including multiple probates if you own property in other states
    • Prevents court control of assets at incapacity
    • Brings all of your assets together under one plan
    • Provides maximum privacy
    • Quicker distribution of assets to beneficiaries
    • Assets can remain in trust until you want beneficiaries to inherit
    • Can reduce or eliminate estate taxes
    • Inexpensive, easy to set up and maintain
    • Can be changed or cancelled at any time
    • Difficult to contest
    • Prevents court control of minors' inheritances
    • Can protect dependents with special needs
    • Prevents unintentional disinheriting and other problems of joint ownership
    • Professional management with corporate trustee
    • Peace of mind
  • Introduction
    These days many people choose a revocable living trust instead of relying on a will or joint ownership in their estate plan. They like the cost and time savings, plus the added control over assets that a living trust can provide.

    For example, when properly prepared, a living trust can avoid the public, costly, and time-consuming court processes at death (probate) and incapacity (conservatorship or guardianship). It can let you provide for your spouse without disinheriting your children, which can be important in second marriages. It can save estate taxes. And it can protect inheritances for children and grandchildren from the courts, creditors, spouses, divorce proceedings and irresponsible spending.

    Still, many people make a big mistake that sends their assets right into the court system: they don't fund their trusts.
  • What is "funding" my trust?
    Funding your trust is the process of transferring your assets from you to your trust. To do this, you physically change the titles of your assets from your individual name (or joint names, if married) to the name of your trust. You will also change most beneficiary designations to your trust.
  • Who controls the assets in my trust?
    The trustee you name will control the assets in your trust. Most likely, you have named yourself as trustee, so you will still have complete control. One of the key benefits of a revocable living trust is that you can continue to buy and sell assets just as you do now. You can also remove assets from your living trust should you ever decide to do so.
  • Why is funding my trust so important?
    If you have signed your living trust document but haven't changed titles and beneficiary designations, you will not avoid probate. Your living trust can only control the assets you put into it. You may have a great trust, but until you fund it (transfer your assets to it by changing titles), it doesn't control anything; your living trust can only control the assets you put into it. If your goal in having a living trust is to avoid probate at death and court intervention at incapacity, then you must fund it now, while you are able to do so.
  • What happens if I forget to transfer an asset?
    Along with your trust, your attorney will prepare a "pour over will" that acts like a safety net. When you die, the will "catches" any forgotten asset and sends it to your trust. The asset will probably go through probate first, but then it can be distributed according to the instructions in your trust.
  • Who is responsible for funding my trust?
    You are ultimately responsible for making sure all of your appropriate assets are transferred to your trust.
  • Won't my attorney do this?
    Typically, you will transfer some assets and your attorney will handle some. Most attorneys will transfer your real estate, then provide you with instructions and sample letters for your other assets. Ideally, your attorney should review each asset with you, explain the procedure, and help you decide who will be responsible for transferring each asset. Once you understand the process, you may decide to transfer many of your assets yourself and save on legal fees.
  • How difficult is the funding process?
    It's not difficult, but it will take some time. Because living trusts are now so widely used, you should meet with little or no resistance when transferring your assets. For some assets, a short assignment document will be used. Others will require written instructions from you. Most can be handled by mail or telephone.

    Some institutions will want to see proof that your trust exists. To satisfy them, your attorney will prepare what is often called a certificate of trust. This is a shortened version of your trust that verifies your trust's existence, explains the powers given to the trustee and identifies the trustees, but it does not reveal any information about your assets, your beneficiaries and their inheritances.

    While the process isn't difficult, it's easy to get sidetracked or procrastinate. Just make funding your trust a priority and keep going until you're finished. Make a list of your assets, their values and locations, then start with the most valuable ones and work your way down. Remember why you are doing this, and look forward to the peace of mind you'll have when the funding of your trust is complete.
  • Which assets should I put in my trust?
    The general idea is that all of your assets should be in your trust. However, as we'll explain, there are a few assets you may not want in, or that cannot be put into, your trust. Also, your attorney may have a valid reason (like avoiding a potential lawsuit) for leaving a certain asset out of your trust.

    Generally, assets you want in your trust include real estate, bank/saving accounts, investments, business interests and notes payable to you. You will also want to change most beneficiary designations to your trust so those assets will flow into your trust and be part of your overall plan. IRAs, retirement plans and other exceptions are addressed later.
  • Will putting real estate in my trust cause any inconveniences?
    In most cases, you will notice little difference. You may even find it easy to transfer real estate you own to your living trust, and to purchase new real estate in the name of your trust. Refinancing may not be as easy. Some lending institutions require you to conduct the business in your personal name and then transfer the property to your trust. While this can be annoying, it is a minor inconvenience that is easily satisfied.

    Because your living trust is revocable, transferring real estate to your trust should not disturb your current mortgage in any way. Even if the mortgage contains a "due on sale or transfer" clause, retitling the property in the name of your trust should not activate the clause. There should be no effect on your property taxes because the transfer does not cause your property to be reappraised. Also, having your home in your trust will have no effect on your being able to use the capital gains tax exemption when you sell it.

    Also, having your trust as the owner on your homeowner, liability and title insurance may make it easier for a successor trustee to conduct business for you. Check with your agent.
  • What about out-of-state property?
    If you own property in another state, transferring it to your living trust will prevent a conservatorship and/or probate in that state. Your attorney can contact a title company or an attorney in that state to handle the transfer for you.
  • What about contaminated property?
    Property that has been contaminated (for example, from a gas station with underground tanks or by a printing facility that used chemicals) can be placed in your living trust, but the trustee can be held personally responsible for any clean up. If you are your own trustee, this is a moot point because, as the owner, you are already responsible. But if clean up is not complete by the time your successor trustee steps in, your successor and, ultimately, your beneficiaries can also be liable. If you suspect this may apply to you, tell your attorney before you transfer the property to your trust.
  • What about community property status?
    Community property status can be continued inside your living trust. Also, if you live in a community property state, your attorney may suggest that jointly-owned assets, especially real estate, be retitled as community property before they are put in your living trust. This can reduce capital gains tax if the asset is sold after one spouse dies.
  • Should I put my life insurance in my trust?
    That depends on the size of your estate. Federal estate taxes must be paid if the net value of your estate when you die is more than the amount exempt at that time. Some states have their own estate/inheritance tax, and it is possible your estate could be exempt from federal tax and still have to pay state tax.

    Your taxable estate includes benefits from life insurance policies you can borrow against, assign or cancel, or for which you can revoke an assignment, or name or change a beneficiary.

    If your estate will not have to pay estate taxes, naming your living trust as owner and beneficiary of the policies will give your trustee maximum control over them and the proceeds.

    If your estate will be subject to estate taxes, it would be better to set up an irrevocable life insurance trust and have it own your policies for you. This will remove the value of the insurance from your estate, reduce estate taxes and let you leave more to your loved ones.

    There are some restrictions on transferring existing policies to an irrevocable life insurance trust. If you die within three years of the transfer date, the IRS will consider the transfer invalid and the insurance will be back in your estate. There may also be a gift tax.

    These restrictions, however, do not apply to new policies purchased by the trustee of this trust. If you have a sizeable estate, your attorney will be able to advise you on this and other ways to reduce estate taxes.
  • Should my trust own my car?
    Unless the car is valuable and substantially increases your estate, you will probably not want it in your trust. The reason is if you are at fault in an auto accident and the injured party sees that your car is owned by a trust, he or she may think "deep pockets" and be more likely to sue you.

    All states allow a small amount of assets to transfer outside of probate; the value of your car may be within this limit. Some states let you name a beneficiary; in some, cars do not even go through probate. Your attorney will know the laws and procedures in your state and will be able to advise you.
  • What about my IRA and other tax-deferred plans?
    Do not change the ownership of these to your living trust. You can name your trust as the beneficiary, but be sure to consider all your options which could include your spouse; children, grandchildren or other individuals; a trust; a charity; or a combination of these. Whom you name as beneficiary will determine the amount of tax-deferred growth that can continue on this money after you die.

    Most married couples name their spouse as beneficiary because 1) the money will be available to provide for the surviving spouse and 2) the spousal rollover option can provide for many more years of tax-deferred growth. (After you die, your spouse can "roll over" your tax-deferred account into his/her own IRA and name a new beneficiary, preferably someone much younger, as your children and/or grandchildren would be.) A nonspouse beneficiary can also inherit a tax-deferred plan and roll it into an IRA to continue the tax-deferred growth, but only a spouse can name additional beneficiaries.

    Of course, any time you name an individual as beneficiary, you lose control. After you die, the beneficiary can do whatever he or she wants with this money, including cashing out the account and destroying your carefully made plans for long-term, tax-deferred growth. The money could also be available to creditors, spouses and ex-spouses, and there is the risk of court interference at incapacity.

    Naming a trust as beneficiary will give you maximum control because the distributions will be paid not to an individual, but into a trust that contains your written instructions stating who will receive this money and when. After you die, distributions will be based on the life expectancy of the oldest beneficiary of the trust. You can also set up separate trusts for each beneficiary so that each one's life expectancy can be used.

    The rules for these plans have recently been made simpler, but it is still easy to make a costly mistake. Because there is often a lot of money at risk, be sure to get expert advice.
  • Are there any assets I should not put in my trust?
    If you live in an noncommunity property state and have owned an asset jointly with your spouse since before 1976, transferring the asset to your living trust could cause your surviving spouse to pay more in capital gains tax if he or she decides to sell the asset after you die.

    If the asset is your personal residence, this would not be a problem unless the gain is more than $500,000. But it could be a problem for other assets like farmland, commercial real estate or stocks. If you think this might apply to your situation, be sure to check with your tax advisor or attorney before you change the title to your trust.

    Other assets that should probably not be transferred to your trust are incentive stock options, Section 1244 stock and professional corporations. If you unsure whether or not to transfer an asset to your trust, check with your attorney.
  • What about property that doesn't have a title?
    Personal property (artwork, clothing, jewelry, cameras, sporting equipment, books and other household goods) typically does not have a formal title. Your attorney will prepare an assignment to transfer these items to your trust.
  • What if I buy new assets after I fund my trust?
    Find out if you can take the title initially as trustee of your trust. If not, transfer the title right away. If you're not sure how to transfer it, contact your attorney for instructions.
  • Funding Your Living Trust (Summary)
    Assets You Probably Want in Your Living Trust
    • Real property (home, land, other real estate)*
    • Bank/credit union accounts, safe deposit boxes
    • Investments (CDs, stocks, mutual funds, etc.)
    • Notes payable (money owed to you)
    • Life insurance (or use irrevocable trust)
    • Business interests, intellectual property
    • Oil and gas interests, foreign assets
    • Personal untitled property

    Assets You May Not Want in Your Living Trust
    • IRA and other tax-deferred retirement accounts
    • Incentive stock options and Section 1244 stock
    • Interests in professional corporations
  • What are estate taxes?
    Estate taxes are different from and in addition to probate expenses, which can be avoided with a revocable living trust, and final income taxes, which must be paid on income you receive in the year you die.

    Federal estate taxes are expensive (historically, 45%-55%) and they must be paid in cash, usually within nine months after you die. Because few estates have the cash, it has often been necessary to liquidate assets to pay these taxes. But, if you plan ahead, you can reduce and even eliminate estate taxes.
  • Who has to pay estate taxes?
    Your estate will have to pay federal estate taxes if its net value when you die is more than the exempt amount set by Congress at that time. In 2011 and 2012, the federal exemption is $5 million (adjusted for inflation in 2012) and the tax rate is 35%. If Congress does not act before the end of 2012, the exemption in 2013 will be $1 million and the top tax rate will be 55%. Some states have their own death or inheritance tax, so your estate could be exempt from federal tax and still have to pay state tax.
  • How is the net value of my estate determined?
    To determine the current net value, add your assets, then subtract your debts. Include your home, business interests, bank accounts, investments, personal property, IRAs, retirement plans and death benefits from your life insurance.
  • How can I reduce or eliminate my estate taxes?
    In the simplest terms, there are three ways:

    1. If you are married, use both estate tax exemptions.
    2. Remove assets from your estate before you die.
    3. Buy life insurance to replace assets given to charity and/or pay any remaining estate taxes.
  • Use Both Exemptions
    If your spouse is a U.S. citizen, you can leave him or her an unlimited amount when you die with no estate tax. But there can be problems when the second spouse dies.

    For example, let's say Bob and Sue have a combined net estate of $10 million and they both die when the federal exemption is $5 million. When Bob dies, he leaves everything to Sue, so no estate taxes are due then. But when Sue dies, her estate of $10 million uses her $5 million exemption. The tax bill on the remaining $5 million? $1,750,000!

    Congress tried to fix this. If Bob dies in 2011 or 2012, his unused exemption can be transfered to Sue. But if Sue remarries and outlives her new husband, she would lose Bob's unused exemption. Also, by leaving everything to Sue, Bob has no control over how his share of the assets are managed or distributed. Plus, any growth on the assets will be included in Sue's estate and taxed when she dies.

    If Bob and Sue plan ahead, they can use both exemptions and solve these problems. A tax-planning provision in their living trust splits their $10 million estate into two trusts of $5 million each. When Bob dies, his trust uses his $5 million exemption. When Sue dies, her trust uses her $5 million exemption. This reduces their taxable estate to $0, so the full $10 million can go to their loved ones.

    In addition, Bob can keep control over how his share of the estate is managed and distributed; the assets are valued and taxed only at his death, so no growth is included in Sue's estate; yet, the assets in Bob's trust can be available for anything Sue needs. Married couples with estates of all sizes find these benefits appealing. (This planning can also be done in a will, but you would not avoid probate or enjoy the other benefits of a living trust.)
  • Remove Assets From Your Estate
    One way to reduce estate taxes is to reduce the size of your estate before you die. So, spend some and enjoy it! Also, you probably know whom you want to have your assets after you die. If you can afford it, why not make some gifts now and save estate taxes? It can be very satisfying to see the results of your gifts, something you can't do if you wait until you die.

    Appreciating assets are best to give because any future appreciation will also be out of your estate. Gifted assets keep your cost basis (what you paid for them), so recipients may pay capital gains tax when they sell. But at 15% on assets held longer than 12 months, that would be less than estate taxes (35-55%) if you keep the assets until you die.

    Some popular strategies are introduced below. Note that these are irrevocable, so you can't change your mind later.
  • Tax-Free Gifts
    Federal law lets you give up to $13,000 ($26,000 if married) to as many people as you wish each year. So if you give $13,000 to each of your two children and five grandchildren, you will reduce your estate by $91,000 a year (7 x $13,000), $182,000 if your spouse joins you. (This amount is tied to inflation and may increase every few years.) State laws may differ.

    If you give more than this, the excess will be considered a taxable gift and will be applied to your $5 million ($10 million if married) "unified" gift and estate tax exemption. (If you use it while you are living, it's considered a gift tax exemption; if you use it after you die, it's an estate tax exemption.) Charitable gifts are still unlimited. So are gifts for tuition and medical expenses if you give directly to the institution.
  • Irrevocable Life Insurance Trust (ILIT)
    You can remove the value of your insurance from your estate by making an ILIT the owner of the policies. As long as you live three years after the transfer of an existing policy, the death benefits will not be included in your estate.

    Usually the ILIT is also beneficiary of the policy, giving you the option of keeping the proceeds in the trust for years, with periodic distributions to your spouse, children and grandchildren. Proceeds kept in the trust are protected from irresponsible spending, creditors and even spouses.
  • Qualified Personal Residence Trust (QPRT)
    A QPRT removes your home, a substantial asset, from your estate now, yet you can continue to live there. It allows you to transfer your home to a trust (QPRT) for a period of time, usually 10-15 years. During this time, you continue to live there. When the trust term is up, the home transfers to the trust beneficiaries, usually your children. If you wish to stay there longer, you may make arrangements to pay rent. If you die before the trust term ends, your home will be included in your estate, just as it would without a QPRT.

    A QPRT "leverages" your estate tax exemption. Since your children will not receive the house until the trust ends, its value as a gift is reduced. For example, if the current value of your home is $250,000 and you put it in a QPRT for 15 years, its value for tax purposes could be as little as $75,000. That leaves much more of your exemption for other assets.
  • Grantor Retained Annuity Trust (GRAT) and Grantor Retained Unitrust (GRUT)
    These are much like a QPRT. The main difference is that a GRAT or GRUT lets you transfer an income-producing asset (stock, real estate, business) to a trust for a set number of years, removing it from your estate -- and still receive the income. (If the income is a set amount, the trust is called a GRAT. If the income fluctuates, it's called a GRUT.)

    When the trust ends, the asset will go to the beneficiaries of the trust. Since they will not receive it until then, the value of the gift is reduced. If you die before the trust ends, some or all of the asset may be in your estate.
  • Limited Liability Company (LLC) and Family Limited Partnership (FLP)
    FLPs and LLCs let you reduce estate taxes by transferring assets like a family business, farm, real estate or stocks to your children now, and still keep some control. They can also protect the assets from future lawsuits and creditors.

    Here's how they work. You and your spouse can set up an LLC or FLP and transfer assets to it. In exchange, you receive ownership interests. Though you have a fiduciary obligation to other owners, you control the LLC (as manager) or FLP (as general partner). You can give ownership interests to your children, which removes value from your taxable estate. These interests cannot be sold or transferred without your approval, and because there is no market for these interests, their value is often discounted. This lets you transfer the underlying assets to your children at a reduced value, without losing control.
  • Charitable Remainder Trust (CRT)
    A CRT lets you convert a highly appreciated asset (like stocks or investment real estate) into a lifetime income without paying capital gains tax when the asset is sold. It also reduces your income and estate taxes, and lets you benefit a charity that has special meaning to you.
    With a CRT, you transfer the asset to an irrevocable trust. This removes it from your estate. You also get an immediate charitable income tax deduction.
    The trust then sells the asset at market value, paying no capital gains tax, and reinvests in income-producing assets. For the rest of your life, the trust pays you an income. Since the principal has not been reduced by capital gains tax, you can receive more income over your lifetime than if you had sold the asset yourself. After you die, the trust assets go to the charity you have chosen.
  • Charitable Lead Trust (CLT)
    A CLT is just about the opposite of a CRT. You transfer an asset to the trust, which reduces the size of your estate and saves estate taxes. But instead of paying the income to you, the trust pays it to a charity for a set number of years or until you die. After the trust ends, the trust assets will go to your spouse, children or other beneficiaries.
  • Buy Life Insurance
    Depending on your age and health, buying life insurance can be an inexpensive way to replace an asset given to charity and/or to pay any remaining estate taxes. The three-year rule mentioned earlier does not apply to new policies. But you should not be the owner of the policy -- that would increase your taxable estate and estate taxes. To keep the death benefits out of your estate, set up an ILIT and have the trustee purchase the policy for you.
  • How To Reduce or Eliminate Estate Taxes Summary Chart
    1. If Married, Use Both Exemptions
    Living Trust with Tax Planning
    • Uses both spouses' estate tax exemptions, doubling the amount protected from estate taxes and saving a substantial amount for your loved ones.

    2. Remove Assets From Estate
    Make Annual Tax-Free Gifts
    • Simple, no-cost way to save estate taxes by reducing size of estate
    • $13,000 ($26,000 if married) each year per recipient (amount tied to inflation)
    • Unlimited gifts to charity and for medical/educational expenses paid to provider

    Transfer Life Insurance Policies to Irrevocable Life Insurance Trust
    • Removes death benefits of existing life insurance policies from estate
    • Included in estate if you die within three years of transfer

    Qualified Personal Residence Trust
    • Removes home from estate at discounted value
    • You can continue to live there

    Grantor Retained Annuity Trust / Grantor Retained Unitrust
    • Removes income-producing assets from estate at discounted value
    • You can continue to receive income

    Limited Liability Company / Family Limited Partnership
    • Lets you start transferring assets to children now to reduce your taxable estate
    • Often discounts value of business, farm, real estate or stock
    • Can protect the assets from future lawsuits, creditors, spouses
    • You keep control

    Charitable Remainder Trust
    • Converts appreciated asset into lifetime income with no capital gains tax
    • Saves estate taxes (asset out of estate) and income taxes (charitable deduction)
    • Charity receives trust assets after you die

    Charitable Lead Trust
    • Removes asset from your estate, saving estate taxes
    • Income goes to charity for set time period, then trust assets go to loved ones

    3. Buy Life Insurance
    Through Irrevocable Life Insurance Trust
    • Can be inexpensive way to pay estate taxes and/or replace charitable gifts
    • Death benefits not included in your estate
  • Introduction
    How would you like to turn your modest tax-deferred account into millions for your family? Depending on whom you name as beneficiary, you can keep this money growing tax-deferred for not only your and your spouse's lifetimes, but also for your children's or grandchildren's lifetimes. That can turn even a modest inheritance into millions.
  • Don't I have to use this money for my retirement?
    When you reach a certain age, usually April 1 after you are 70 1/2, Uncle Sam says you must start taking some money out. (This is called your required beginning date.) But if you do not use all this money before you die, naming the right beneficiary can keep it growing tax-deferred for decades.
  • How much will I have to take out?
    Calculating the amount you must withdraw each year (your required minimum distribution) is much easier now than it used to be. Each year, you divide the year-end value of your account by a life expectancy divisor from the Uniform Lifetime Table (provided by the IRS). The result is the minimum you must withdraw for that year. You can always take out more.

    For example, the divisor at age 70 is 27.4. If your year-end account balance is $100,000, you divide $100,000 by 27.4, making your first required minimum distribution $3,650. Each year the divisor is smaller, but it never goes to zero. Even at age 115 and older, the divisor is 1.9. "To recalculate or not recalculate" is no longer an issue. Everyone now gets the benefit of recalculating his/her expectancy.
  • Doesn't my beneficiary affect my distribution?
    Not any longer. Now, almost everyone uses the same chart to calculate distributions, even if you have no beneficiary. After you die, distributions are based on your beneficiary's life expectancy (or the rest of your life expectancy if you die without one.) Naming the right beneficiary is still critical to getting the most tax-deferred growth. That's much easier to do now, because you are no longer locked into the beneficiary you name when you take your first distribution.
  • Whom can I name as beneficiary?
    You have five basic options: your spouse, if married; your children, grandchildren or other individuals; a trust; a charity; or some combination of the above.
  • Option 1: Spouse
    Most married people name their spouse as beneficiary. That's because 1) the money will be available to provide for the surviving spouse and 2) the spousal rollover option can provide many more years of tax-deferred growth.

    Also, if your spouse is more than ten years younger than you are, you can use a different life expectancy chart that makes your required distributions even less. (This lets the tax-deferred growth continue longer on more money.)
  • How does the spousal rollover option work?
    If you die first, your surviving spouse can "roll over" your tax-deferred account into his/her own IRA, further delaying income taxes until he/she must start taking required minimum distributions on April 1 after age 70 1/2.

    When your spouse does the rollover, he/she must name a new beneficiary, preferably someone much younger, as your children and/or grandchildren would be. After your spouse dies, the beneficiary's actual life expectancy can be used for the remaining required minimum distributions. The results, shown in the chart below, can be phenomenal.

    For example, let's say your grandson is 20 when he inherits a $100,000 IRA from your spouse. Over the next 63 years (the life expectancy of a 20-year-old), the $100,000 IRA can provide him with over $1.7 million in income!

    Under current IRS policy, your spouse can do this rollover and stretch out the IRA even if you had started taking required minimum distributions before you died.

    *****

    TOTAL INCOME FROM IRA OVER BENEFICIARY'S LIFETIME*

    Age 20, Life Expectancy 63.0 Years
    Value of $50,000 IRA When Inherited by Beneficiary = $882,865
    Value of $100,000 IRA When Inherited by Beneficiary = $1,765,731
    Value of $500,000 IRA When Inherited by Beneficiary = $8,828,658

    Age 30, Life Expectancy 53.3 Years
    Value of $50,000 IRA When Inherited by Beneficiary = $526,612
    Value of $100,000 IRA When Inherited by Beneficiary = $1,053,225
    Value of $500,000 IRA When Inherited by Beneficiary = $5,266,128

    Age 40, Life Expectancy 43.6 Years
    Value of $50,000 IRA When Inherited by Beneficiary = $321,210
    Value of $100,000 IRA When Inherited by Beneficiary = $642,421
    Value of $500,000 IRA When Inherited by Beneficiary = $3,212,106

    Age 50, Life Expectancy 34.2 Years
    Value of $50,000 IRA When Inherited by Beneficiary = $201,067
    Value of $100,000 IRA When Inherited by Beneficiary = $402,134
    Value of $500,000 IRA When Inherited by Beneficiary = $2,010,671

    * Assumptions: 7% annual return; only required minimum distributions withdrawn. Income subject to income taxes.
  • What happens if my spouse dies first?
    If you don't remarry, you lose the rollover option. This used to be a problem, because distributions after your death would still be based on your and your deceased spouse's life expectancies. But now you can name a new beneficiary, and after you die the distributions will be based on the new beneficiary's life expectancy.
  • Are there any disadvantages of naming my spouse?
    Your spouse will have full control of this money after you die and is under no obligation to follow your wishes. This may not be what you want, especially if you have children from a previous marriage or feel that your spouse may be too easily influenced by others after you're gone.

    Also, if your spouse becomes incapacitated, the court could take control of this money. It could be lost to your spouse's creditors. And, finally, naming your spouse as beneficiary can cause your family to pay too much in estate taxes. (More about this later.) If any of this concerns you, keep reading.
  • Option 2: Children, Grandchildren, Others
    If your spouse will have plenty of assets after you die, if you have reason to believe your spouse will die before you, or if you are not married, you could name your children, grandchildren or other individuals as beneficiary(ies). Because the distributions can be paid over your beneficiary's life expectancy after you die, the tax-deferred growth can continue even without the spousal rollover.
  • Are there any disadvantages?
    Anytime you name an individual as beneficiary, you lose control. After you die, your beneficiary can do whatever he/she wants with this money, including cashing out the entire account and destroying your carefully made plans for long-term, tax-deferred growth. The money could also be available to the beneficiary's creditors, spouses and ex-spouse(s). And there is the risk of court interference at incapacity. If any of this concerns you, consider using a trust.
  • Option 3: Trusts
    Naming a trust as beneficiary will give you maximum control over your tax-deferred money after you die. That's because the distributions will be paid not to an individual, but into a trust that contains your written instructions stating who will receive this money and when.

    For example, your trust could provide income to your surviving spouse for as long as he or she lives. Then, after your spouse dies, the income could go to someone else. The trust could even provide periodic income to your children or grandchildren, keeping the rest safe from irresponsible spending and/or creditors.

    While you are living, the required minimum distributions will still be paid to you over your life expectancy. After you die, the required distributions can be paid to the trust over the life expectancy of the oldest beneficiary of the trust.

    The trustee can withdraw more money if needed to follow your instructions, but the rest can stay in the account and continue to grow tax-deferred. You can name anyone as trustee, but many people name a bank or trust company, especially if the trust will exist for a long period of time.
  • Are there any disadvantages?
    You will not be able to provide for your spouse and stretch out the tax-deferred growth beyond your spouse's actual life expectancy. That's because you must use the life expectancy of the oldest beneficiary of the trust which, in this case, would probably be your spouse.

    Also, many trusts pay income taxes at a higher rate than most individuals, but this only applies to income that stays in the trust. Distributions from your tax-deferred account that are paid to the trust are subject to income taxes and if the money stays in the trust, the higher tax rates would apply. But usually this is not a problem because the trustee has authority to distribute the money to the beneficiaries of the trust, who pay the income taxes at their own rates.

    Finally, the trust must meet certain IRS requirements, including that it is a valid trust under state law. It is advantageous to create an irrevocable Retirement Benefit Trust, also called a Stand-alone Retirement Trust, and to name this trust as the beneficiary on your beneficiary designation form.
  • Option 4: Charity
    If you are planning to leave an asset to charity after you die, a tax-deferred account can be an excellent one to use. That's because the charity will pay no income taxes when it receives the money, and the account will not be included in your taxable estate when you die, reducing the amount your family may have to pay in estate taxes. (More later.)
  • Option 5. Some or All of the Above
    You don't have to choose just one of these options. You can divide a large IRA into several smaller ones and name a different beneficiary for each one. (If your money is in an employer's plan, you can roll it into an IRA and then split it.)

    If you name several beneficiaries for one IRA, the oldest one's life expectancy will determine the payout after you die. But with separate IRAs (one for each beneficiary), each life expectancy will be used, providing the maximum stretch out.

    This is especially important if a charity is involved. It has a life expectancy of zero, so the IRS would consider it the oldest beneficiary. Depending on when you die, this could cause the entire IRA to be paid out in just five years.

    If you divide your IRA now, you will need to calculate a distribution for each one, but it can be worth the trouble. Under the new rules, your IRA can be divided even after you die. Splitting a large IRA can also save estate taxes.
  • What are estate taxes and why should I care?
    Estate taxes are different from, and in addition to, income taxes. When you die, your estate must pay estate taxes if its net value (including your tax-deferred accounts) is more than the amount exempt at that time. In 2012, the federal exemption is $5,120,000; every dollar over this amount is taxed at 35%. Some states also have their own estate/inheritance tax; your estate could be exempt from federal tax but not from state tax.

    Estate taxes must be paid in cash, usually within nine months of your death. If money must be withdrawn from a tax-deferred account to pay the estate taxes, the result can be disastrous - because income taxes must be paid on the money that is withdrawn to pay the estate taxes.
  • What can I do about estate taxes?
    You can reduce your taxable estate by giving some assets to your loved ones now, often at discounted values. You can buy life insurance to pay estate taxes at a reduced cost. And, if you are married, make sure you use both your estate tax exemptions.

    You see, everyone is entitled to an estate tax exemption. But many married couples waste one when they leave all their assets to each other. The marital deduction lets you leave your spouse an unlimited amount of assets when you die and pay no estate taxes at that time. But when your spouse dies later, he or she will only be entitled to one exemption. That can cause your family to pay too much in estate taxes.
  • How can splitting my IRA help?
    Any assets you own, including a tax-deferred account, that you leave to anyone other than your spouse (your children, grandchildren or a trust) can use your exemption. Splitting a large IRA into smaller ones will make this easier to do.
  • What if I'm not married?
    If you are single, naming your beneficiary(ies) will be less complicated because you have just one estate tax exemption and there will be no spousal rollover option to consider.
  • When can I change my beneficiary?
    You can change your beneficiary at any time while you are living, and the distributions after you die will be paid over that beneficiary's life expectancy (unless they cash out).

    It is very important to name both primary and contingent beneficiaries while you are living to allow for greater flexibility and "clean up" after your death. For example, your spouse could disclaim some benefits so a grandchild could inherit. No new beneficiaries can be added after you die (unless your spouse names new ones with a rollover), so make sure you include all appropriate ones.

    Some employer-sponsored plans (401(k), pension and profit sharing plans, etc.) have restrictions on beneficiary distribution options. But under a new rule, any beneficiary may now inherit employer plan assets and roll them into an IRA in the name of the decedent, continuing the tax-deferred growth over the beneficiary's own life expectancy. (Some restrictions apply.)

    If your plan will not let you do what you want, rolling your account into an IRA will usually give you more options. If your money is already in an IRA and the institution will not agree to your wishes, move your IRA to one that will.
  • What about a Roth IRA?
    If you qualify, you may want to convert some or all of your tax-deferred money into a Roth IRA, but you'll have to pay taxes on the amount you convert. Also, if you qualify, you can make after-tax contributions to a Roth IRA.

    Unlike a traditional IRA that requires you to start taking money out on April 1 after age 70 1/2, there are no minimum distributions required during your lifetime with a Roth IRA. And, generally, after five years or age 59 1/2 (whichever is later), all withdrawals are income tax-free. So you can leave your money there, growing tax-free, for as long as you wish.

    You can stretch out a Roth IRA just like a regular IRA. After you die, distributions can be paid over the actual life expectancy of your beneficiary. Your spouse can even do a rollover and name a new beneficiary. And, remember, all distributions to your beneficiaries will be income tax-free.
  • Do I need professional assistance?
    Yes. Even though the rules are now simpler, they are still loaded with tax traps and penalties. Make sure you get expert advice, especially if you have a sizeable amount in tax-deferred plans and your estate is large enough to pay estate taxes.
  • What is a corporate trustee?
    With people living longer and health care costs continuing to rise, our savings must grow larger and last longer. Deciding where to put your money in an uncertain market with so many investment options from which to choose can be very confusing, and making a wrong decision can be very costly.

    One option you should not overlook is the bedrock of asset management and personal service -- the corporate trustee.

    A corporate trustee is a bank trust department or trust company. Its employees can help you build, manage and protect your wealth when you put your assets in a trust.

    A trust is simply a legal document that lets you reduce unnecessary legal fees, save taxes and keep control over your assets while you are living, if you become physically or mentally incapacitated, and after you die.

    When you set up a trust, you need to name someone (a trustee) to manage the assets your trust controls. While you can choose just about any adult, there are very good reasons why you should consider a corporate trustee.
  • 7 Reasons To Use A Corporate Trustee
    1. You'll gain the advantage of years of experience.
    Because they manage trusts on a daily basis, they are familiar with all kinds of trusts, tax and estate planning strategies, and the legal responsibilities of a trustee.

    They can manage the assets in your trust now and/or after you die as your trust directs -- buying and selling assets, paying bills, filing tax returns, maintaining accurate records, and distributing income and assets. Most have experience with all kinds of assets, including stocks and bonds, real estate, farms, closely held businesses, mineral properties, international investments, and collectibles.

    2. You'll enjoy the potential of even greater investment returns.
    Corporate trustees give their full attention to managing trust assets -- that's their job. And because their staff collectively has more experience and resources than an individual, they often achieve better results.

    After discussing your financial goals, risk tolerance and long-term objectives with you, they will recommend the best investment strategy for you. Then, depending on how involved you want them to be, they can provide ongoing advice, or even make decisions for you, to make sure your investments stay on track to reach your goals.

    3. You'll protect your wealth because corporate trustees are regulated by both state and federal agencies.
    Also, most courts consider them "experts" and expect them to meet higher standards than a nonprofessional.

    4. You'll receive reliable, professional service.
    A corporate trustee won't become ill or die, divorce, go on vacation, move away or become distracted by personal concerns or emotions as an individual might.

    5. You'll value their objectivity.
    They will follow your trust instructions objectively and faithfully, something family members are often unable to do.

    6. You'll tap their rich sources of advice and referrals.
    They routinely provide advice on investment, tax, retirement and estate planning issues, and can refer you to attorneys and other qualified professionals as needed.

    7. You'll enjoy peace of mind.
    Knowing you have selected someone with experience and integrity to manage your financial affairs now and/or when you are no longer able to do so yourself can be very reassuring.
  • When would I use a corporate trustee?
    If you set up an irrevocable trust (like a charitable or life insurance trust) or you plan to make gifts in trust -- strategies often used to save estate taxes by removing assets now from your taxable estate -- you will probably need to name someone other than yourself as trustee for tax reasons. A corporate trustee is a natural choice to make sure your irrevocable trust is administered properly.

    If you set up a revocable living trust -- to avoid probate when you die and prevent court control of your assets at incapacity -- you can be your own trustee. Even so, there are many benefits to having a corporate trustee involved. They can assist you in several ways...
  • As Trustee
    As trustee, a corporate trustee has full responsibility for managing your trust assets according to your instructions.

    This would be an excellent choice if you are elderly and have no one you can trust to take care of your financial affairs. You may be widowed, have no children or other trusted relatives living nearby (or don't want to burden them), or you and your spouse may be in declining health.

    Even if you are capable of managing your own trust, a corporate trustee can be a wise choice. You may not have the time, desire or investment experience to manage your trust yourself. Or perhaps you just feel that someone with more time and experience could do a better job than you.
  • As Co-Trustee
    If you want to take advantage of a corporate trustee's investment experience but still be involved, you could have one work with you as co-trustee. Developing a working relationship with a corporate trustee now lets them become familiar with your objectives, your trust and your beneficiaries' needs and personalities while you are around and able to provide guidance and input.

    It would also let you see how they would perform in your absence, let you evaluate their investment performance and service, and let you see how comfortable you feel with them overall -- a kind of "trustee test drive."
  • As Investment Agent
    You could also name a corporate trustee as agent. While a co-trustee has equal responsibility with you (usually both signatures are required to transact business), an agent can have as much responsibility as you wish.

    You can have an agent manage only a portion of your trust's assets (your stocks and bonds, for example) or just provide you with investment advice, with you making all final investment decisions.
  • As Successor Trustee
    If you decide to be your own trustee (for example, of your revocable living trust), consider naming a corporate trustee as your successor trustee. In this capacity, they will step in and manage your trust for you when you can no longer act due to incapacity or death. Many people like the idea of having a professional take care of the paperwork, tax filings and other final details.
  • Couldn't I name a relative or friend instead?
    You could, but keep in mind that family and friends are not always a good choice to be involved with your trust.

    They may be too busy with their own affairs, may reside in a distant area, may not get along with other family members, or may not be responsible or experienced enough to manage the trust assets. An innocent error by a well-meaning but inexperienced relative or friend could negate your careful planning and cost your beneficiaries thousands of dollars.

    One option is having a relative (perhaps one or more of your adult children) and a corporate trustee work together. This would give you the professional experience and objectivity of a corporate trustee and the personal involvement of someone who knows you.
  • Do I lose control if I use a corporate trustee?
    Not if the trust is prepared correctly. With most trusts, you can change your trustee at any time if you aren't satisfied. Even with an irrevocable trust, you or your beneficiaries can have the right to change the corporate trustee.

    Also, the trustee you select must follow the instructions you put in your trust -- while you are living, if you become incapacitated, and after you die. That's because a trust is a binding legal contract, and your trustee can be held liable if he or she doesn't follow your instructions.
  • How safe are trust assets?
    Even if a bank or trust company fails, trust assets are safe. By law, trust assets must be kept separate from all other assets. They cannot be loaned out, mixed with the corporate trustee's own assets or used to satisfy its creditors. Because of these safeguards, trust assets are not insured by the FDIC.

    You are also protected against fraud, theft (for example, if an employee takes trust assets and disappears), or if they make an error administering your trust. But, of course, there is no insurance or bond that will protect you if your assets lose value simply due to a decline in market values.
  • Should everyone use a corporate trustee?
    No, of course not. But many more people should consider one. Most people are just not aware of the many benefits a corporate trustee can offer them and their families.

    You need to look objectively at your situation and the type of trust you set up. If you have a modest estate and your trust is fairly simple, you may be fine being your own trustee and having a capable family member step in for you when you can no longer manage your trust yourself.

    But if your estate is larger, has a variety of assets, includes tax planning, or if you doubt your relatives' capabilities or intentions, definitely consider a corporate trustee.
  • Are there any disadvantages to using a corporate trustee?
    Because they must objectively follow the instructions for the trusts they manage, some beneficiaries (especially those who want the money now instead of when the trust states) have found them to be uncooperative.

    But that may be exactly what you want. One reason why many trusts are set up, and a corporate trustee chosen, is to keep a beneficiary from getting the money until Mom and Dad (or whoever set up the trust) intended.

    However, if you are concerned about a corporate trustee being too impersonal, you can always name a family member or close friend to act with them as co-trustee.
  • Is a corporate trustee expensive?
    Most are very reasonable, especially when you compare their fee to the costs of paying others for estate and tax planning advice, for investment management, for preparing tax returns, and for investment trading commissions.

    A corporate trustee typically provides all these services and more for only a small percentage of the value of the assets they manage for you. (Fees are published, so you can find out what they are.) And because their compensation is based on how much those assets are worth (instead of on how many trades they make for you), a corporate trustee is motivated to help your assets grow.
  • How can I evaluate a corporate trustee?
    Talk to several. Visit them if you can. Ask how long the trust department has been in business, how many trusts they manage, minimum and average size of trusts they manage (most require a certain amount of assets) and how much experience their people have in the trust business.

    Compare investment returns, fees (including when and how much the last increase was), and services. Ask to see samples of statements or reports you would receive and see how easy they are to understand.

    Facts and numbers are important, but so are the people. Do they seem to genuinely care about you and your family? Do they listen and seem to understand your concerns? Can you understand them? How confident are you that they will be there for you and your family when they are needed?
  • Could a Corporate Trustee Help You? Look at These 18 Real-Life Situations
    Building Wealth with Professional Asset Management

    • My spouse took care of all our investments. Since he (she) died, I don't know what to do or whom to trust.
    • I don't know where I should invest my money. I'm so confused by everything I read.
    • I just received a large inheritance. I've never had to invest this much money before.
    • I travel a lot now (business or pleasure) and I don't have time to manage my investments like I used to.
    • I recently sold my business (or other assets). Now I just need to figure out how to invest my money.
    • I just received a large settlement from a lawsuit, divorce, etc.

    Wealth Protection with Retirement/Estate Planning
    • I'm retiring soon. I'm not sure how I should take distributions from my IRA and other plans.
    • I'm a business owner/professional and I'm wondering what my options are for retirement plans.
    • I'm changing jobs. Should I take a lump sum distribution from my current retirement plan?
    • I want to avoid probate and save estate taxes.

    Smooth Settling of an Estate
    • I'm executor/personal representative of my father's estate (trustee of my father's trust). I don't know what I'm supposed to do or how to do it.

    Peace of Mind at Incapacity
    • I worry about what will happen to me and my money if I become mentally or physically incapacitated.
    • I'm concerned about my mother (father). I don't have the time to help her with her finances, and I'm worried she might be taken in by some scam.

    Caring for Loved Ones/Gifts
    • One of my children is not responsible with his own money. I shudder to think what will happen to his inheritance -- my money -- after I die.
    • I want my children to be responsible and productive -- not spoiled or lazy from a large inheritance.
    • I'd like to make gifts to my children and grandchildren to save estate taxes.
    • I have a child with special needs. I worry about what will happen to him when something happens to me.
    • I'd like to make a large gift to a charity.
  • What does a CRT do?
    Since 1969, countless families have used charitable remainder trusts (CRTs) to increase their incomes, save taxes and benefit charities.

    A CRT lets you convert a highly appreciated asset (like stock or real estate) into lifetime income. It reduces your income taxes now and estate taxes when you die. You pay no capital gains tax when the asset is sold. And it lets you help one or more charities that have special meaning to you.
  • How does a CRT work?
    You transfer an appreciated asset into an irrevocable trust. In many cases, this has the practical effect of removing the asset from your estate, and if so, no estate taxes will be due on it when you die. You also receive an immediate charitable income tax deduction.

    The trustee then sells the asset at full market value, paying no capital gains tax, and re-invests the proceeds in income-producing assets. For the rest of your life, the trust pays you an income. When you die, the remaining trust assets go to the charity(ies) you have chosen. That's why it's called a charitable remainder trust.
  • Why not sell the asset myself and re-invest?
    You could, but you would pay more in taxes and there would be less income for you. Let's look at an example.

    Years ago, Max and Jane Brody (ages 65 and 63) purchased some stock for $100,000. It is now worth $500,000. They would like to sell it and generate some retirement income.

    If they sell the stock, they would have a gain of $400,000 (current value less cost) and would have to pay $80,000 in federal capital gains tax (20% of $400,000). That would leave them with $420,000.

    If they re-invest and earn a 5% return, that would provide them with $21,000 in annual income. Multiplied by their life expectancy of 26 years, this would give them a total lifetime income (before taxes) of $546,000. Because they still own the assets, there is no protection from creditors and no charitable income tax deduction is available.
  • What happens if they use a CRT?
    If they transfer the stock to a CRT instead, the Brodys can take an immediate charitable income tax deduction of $90,357. Because they are in a 35% tax bracket, this will reduce their current federal income taxes by $31,625.

    The trustee will sell the stock for the same amount, but because the trust is exempt from capital gains tax, the full $500,000 is available to re-invest. The same 5% return will produce $25,000 in annual income which, before taxes, will total $650,000 over their lifetimes. That's $78,000 more in income than if the Brodys had sold the stock themselves. And because the assets are in an irrevocable trust, they are protected from creditors.
  • What are my income choices?
    You can receive a fixed percentage of the trust assets (like the Brodys), in which case your trust would be called a charitable remainder unitrust. With this option, the amount of your annual income will fluctuate, depending on investment performance and the annual value of the trust.

    The trust will be re-valued at the beginning of each year to determine the dollar amount of income you will receive. If the trust is well managed, it can grow quickly because the trust assets grow tax-free. The amount of your income will increase as the value of the trust grows.

    Sometimes the assets contributed to the trust (like real estate or stock in a closely-held corporation) are not readily marketable, so income is difficult to pay. In that case, the trust can be designed to pay the lesser of the fixed percentage of the trust's assets or the actual income earned by the trust. A provision is usually included so that, if the trust has an off year, it can "make up" any loss of income in a better year.
  • Can I receive a fixed income instead?
    Yes. You can elect instead to receive a fixed income, in which case the trust would be called a charitable remainder annuity trust. This means that, regardless of the trust's performance, your income will not change.

    This option is usually a good choice at older ages. It doesn't provide protection against inflation like the unitrust does, but some people like the security of being able to count on a definite amount of income each year. It's best to use cash or readily marketable assets to fund an annuity trust.

    In either (unitrust or annuity trust), the IRS requires that the payout rate stated in the trust cannot be less than 5% or more than 50% of the initial fair market value of the trust's assets.
  • Who can receive income from the trust?
    Trust income, which is generally taxable in the year it is received, can be paid to you for your lifetime. If you are married, it can be paid for as long as either of you lives.

    The income can also be paid to your children for their lifetimes or to any other person or entity you wish, providing the trust meets certain requirements. In addition, there are gift and estate tax considerations if someone other than you receives it. Instead of lasting for someone's lifetime, the trust can also exist for a set number of years (up to 20).
  • Do I have to take the income now?
    No. You can set up the trust and take the income tax deduction now, but postpone taking the income until later. By then, with good management, the trust assets will have appreciated considerably in value, resulting in more income for you.
  • How is the income tax deduction determined?
    The deduction is based on the amount of income received, the type and value of the asset, the ages of the people receiving the income, and the Section 7250 rate, which fluctuates. (Our example is based on a 3.0% Section 7250 rate.) Generally, the higher the payout rate, the lower the deduction.

    It is usually limited to 30% of adjusted gross income, but can vary from 20% to 50%, depending on how the IRS defines the charity and the type of asset. If you can't use the full deduction the first year, you can carry it forward for up to five additional years. Depending on your tax bracket, type of asset and type of charity, the charitable deduction can reduce your income taxes by 10%, 20%, 30% or even more.
  • What kinds of assets are suitable?
    The best assets are those that have greatly appreciated in value since you purchased them, specifically publicly traded securities, real estate and stock in some closely-held corporations. (S-corp stock does not qualify. Mortgaged real estate usually won't qualify, either, but you might consider paying off the loan.) Cash can also be used.
  • Who should be the trustee?
    You can be your own trustee. But you must be sure the trust is administered properly -- otherwise, you could lose the tax advantages and/or be penalized. Most people who name themselves as trustee have the paperwork handled by a qualified third party administrator.

    However, because of the experience required with investments, accounting and government reporting, some people select a corporate trustee (a bank or trust company that specializes in managing trust assets) as trustee. Some charities are also willing to be trustees.

    Before naming a trustee, it's a good idea to interview several and consider their investment performance, services and experience with these trusts. Remember, you are depending on the trustee to manage your trust properly and to provide you with income.
  • Do I still have some control?
    Yes. For as long as you live, the trustee you select -- not the charity -- controls the assets. Your trustee must follow the instructions you put in your trust. You can retain the right to change the trustee if you become dissatisfied. You can also change the charity (to another qualified charity) without losing the tax advantages.
  • Can I make any other changes?
    Generally, once an irrevocable trust is signed, you cannot make any other changes. Be sure you understand the entire document and it is exactly what you want before you sign.
  • Sounds great for me. But if I give away the asset, what about my children?
    If you have a sizeable estate, the asset you place in a CRT may only be a small percentage of your assets, so your children may be well taken care of. However, if you are concerned about replacing the value of this asset for your children, there is an easy way to do so.

    You can take the income tax savings, and part of the income you receive from the charitable remainder trust, and fund an irrevocable life insurance trust. The trustee of the insurance trust can then purchase enough life insurance to replace the full value of the asset for your children or other beneficiaries.
  • Why use a life insurance trust?
    With a trust, the insurance proceeds will not be included in your estate, so you avoid estate taxes. You can keep the proceeds in the trust for years, making periodic distributions to your children and grandchildren. And any proceeds that remain in the trust are protected from irresponsible spending and creditors (even spouses).

    Life insurance can be an inexpensive way to replace the asset for your children. (Every dollar you spend in premium buys several dollars of insurance.) Insurance proceeds are available immediately, even if you and your spouse both die tomorrow. And, in addition to avoiding estate taxes, the proceeds will be free from probate and income taxes.
  • So what's the catch?
    There really isn't one. Combining a charitable remainder trust with an irrevocable life insurance trust is a winning formula for everyone -- you, your children and the charity.

    You convert an appreciated asset into lifetime income, and because you pay no capital gains tax when the asset is sold, you receive more income than if you had sold it yourself and invested the sales proceeds. You receive an immediate charitable income tax deduction, reducing your current income taxes. And by removing the asset from your estate, you reduce estate taxes that may be due when you die.

    With the life insurance trust replacing the full value of the asset, your children receive much more than if you had sold the asset yourself, and paid capital gains and estate taxes. Plus the proceeds are free of income and estate taxes, and probate.

    Finally, you will make a substantial gift to a favorite charity. And because the charity knows it will receive the gift at some point in the future, it can plan projects and programs now -- benefiting even before receiving the gift.
  • Benefits of a Charitable Remainder Trust
    • Convert an appreciated asset into lifetime income.
    • Reduce your current income taxes with charitable income tax deduction.
    • Pay no capital gains tax when the asset is sold.
    • Reduce or eliminate your estate taxes.
    • Gain protection from creditors for gifted asset.
    • Benefit one or more charities.
    • Receive more income over your lifetime than if you had sold the asset yourself.
    • Leave more to your children or others by using life insurance trust to replace gifted asset.
  • Should I seek professional assistance?
    Yes. If you think a charitable remainder trust would be of value to you and your family, speak with a tax-planning attorney, insurance professional, corporate trustee, investment adviser, CPA, and/or favorite charity. Be sure an attorney experienced in CRTs prepares the documents.
  • What does a life insurance trust do?
    An irrevocable life insurance trust gives you more control over your insurance policies and the money that is paid from them. It also lets you reduce or even eliminate estate taxes, so more of your estate can go to your loved ones.
  • What are estate taxes?
    Estate taxes are different from, and in addition to, probate expenses and final income taxes which are due on the income you receive in the year you die. Federal estate taxes are expensive (historically 45-55%) and they must be paid in cash, usually within nine months after you die. Because few estates have the cash, it has often been necessary to liquidate assets to pay these taxes. But if you plan ahead, estate taxes can be reduced or even eliminated.
  • Who has to pay estate taxes?
    Your estate will have to pay federal estate taxes if its net value when you die is more than the exempt amount set by Congress at that time. In 2011 and 2012, the federal exemption is $5 million (adjusted for inflation in 2012) and the tax rate is 35%. If Congress does not act before the end of 2012, the exemption in 2013 will be $1 million and the top tax rate will be 55%. Some states have their own death or inheritance tax, so your estate could be exempt from federal tax and still have to pay state tax.
  • What makes up my net estate?
    To determine your current net estate, add your assets then subtract your debts. Insurance policies in which you have any "incidents of ownership" are included in your taxable estate. This includes policies you can borrow against, assign or cancel, or for which you can revoke an assignment, or can name or change the beneficiary. You can see how life insurance can increase the size of your estate and the amount of estate taxes that must be paid.
  • How does an insurance trust reduce estate taxes?
    The insurance trust owns your insurance policies for you. Since you don't personally own the insurance or have any incidents of ownership, it will not be included in your estate -- so your estate taxes are reduced. (There is a three-year rule for existing policies, which is explained later.)

    With the exemption at $5 million, you may not need the estate tax savings right now. But it's important to understand how this works, because the exemption may be reduced as soon as 2013 and the value of your net estate may increase substantially by the time you die.

    Let's say you are married, with a combined net estate of $3 million, $1 million of which is life insurance, and both you and your spouse die when the estate tax exemption is $1 million and the top tax rate is 55%. A tax planning provision in a living trust or a will could protect up to $2 million from estate taxes. But your estates would have to pay $435,000 in estate taxes on the additional $1 million. With an insurance trust, the $1 million in insurance would not be in your estate. That would save your family $435,000 in estate taxes.
  • What if my estate is larger than this?
    If your estate will still have to pay estate taxes after you transfer your insurance to a trust, you can reduce your estate tax costs -- by having the trust buy additional life insurance. Here are three very good reasons to do this:

    1. If the trust buys the insurance, it will not be included in your estate. So the proceeds, which are not subject to probate or income taxes, will also be free from estate taxes.
    2. Insurance proceeds are available right after you die. So your assets will not have to be liquidated to pay estate taxes.
    3. Life insurance can be an inexpensive way to pay estate taxes and other expenses. So you can leave more to your loved ones.
  • How does an irrevocable insurance trust work?
    An insurance trust has three components. The grantor is the person creating the trust -- that's you. The trustee you select manages the trust. And the trust beneficiaries you name will receive the trust assets after you die.

    The trustee purchases an insurance policy, with you as the insured, and the trust as owner and (usually) beneficiary. When the insurance benefit is paid after your death, the trustee will collect the funds, make them available to pay estate taxes and/or other expenses (including debts, legal fees, probate costs, and income taxes that may be due on IRAs and other retirement benefits), and then distribute them to the trust beneficiaries as you have instructed.
  • Can I be my own trustee?
    Not if you want the tax advantages we've explained. Some people name their spouse and/or adult children as trustee(s), but often they don't have enough time or experience. Many people choose a corporate trustee (bank or trust company) because they are experienced with these trusts. A corporate trustee will make sure the trust is properly administered and the insurance premiums promptly paid.
  • Why not just name someone else as owner of my insurance policy?
    If someone else, like your spouse or adult child, owns a policy on your life and dies first, the cash/termination value will be in his/her taxable estate. That doesn't help much.

    But, more importantly, if someone else owns the policy, you lose control. This person could change the beneficiary, take the cash value, or even cancel the policy, leaving you with no insurance. You may trust this person now, but you could have problems later on. The policy could even be garnished to help satisfy the other person's creditors. An insurance trust is safer; it lets you reduce estate taxes and keep control.
  • How does an insurance trust give me control?
    With an insurance trust, your trust owns the policy. The trustee you select must follow the instructions you put in your trust. And with your insurance trust as beneficiary of the policies, you will even have more control over the proceeds.

    For example, your trust could allow the trustee to use the proceeds to make a loan to or purchase assets from your estate or revocable living trust, providing cash to pay taxes and expenses. You could provide your spouse with lifetime income and keep the proceeds out of both of your estates. You could keep the money in the trust for years and have the trustee make distributions as needed to trust beneficiaries, which can include your children and grandchildren. Proceeds that stay in the trust can be protected from courts, creditors (even spouses) and irresponsible spending.

    By contrast, if your spouse or children are beneficiaries of the policy, you will have no control over how the money is spent. If your spouse is beneficiary and you die first, all of the proceeds will be in your spouse's taxable estate; that could create a tax problem. Also, your spouse (not you) will decide who will inherit any remaining money after he or she dies.
  • Are there other benefits to naming the trust as beneficiary of an insurance policy?
    Yes. If you name an individual as beneficiary of a policy and that person is incapacitated when you die, the court will probably take control of the money. Most insurance companies will not knowingly pay to an incompetent person, and will usually insist on court supervision. But if your trust is beneficiary of the policy, the trustee can use the proceeds to provide for your loved one without court interference.
  • Who can be beneficiaries of the trust?
    You can name any person or organization you wish. Most people name their spouse, children and/or grandchildren.
  • Where does the trustee get the money to purchase a new insurance policy?
    From you, but in a special way. If you transfer money directly to the trustee, there could be a gift tax. But you can make annual tax-free gifts of up to $13,000 ($26,000 if your spouse joins you) to each beneficiary of your trust. (Amounts may increase periodically for inflation.) If you give more than this, the excess is applied to your federal gift/estate tax exemption.

    Instead of making a gift directly to a beneficiary, you give it to the trustee for the benefit of each beneficiary. The trustee notifies each beneficiary that a gift has been received on his/her behalf and, unless the beneficiary elects to receive the gift now, the trustee will invest the funds -- by paying the premium on the insurance policy. Each beneficiary must understand the consequences of taking the gift now; for example, it may reduce the trustee's ability to pay premiums.
  • Are there any restrictions on transferring my existing policies to an insurance trust?
    Yes. If you die within three years of the date of the transfer, it will be considered invalid by the IRS and the insurance will be included in your taxable estate. There may also be a gift tax. Be sure to discuss this with your advisor.
  • Can I make any changes to the trust?
    An insurance trust is irrevocable, which generally means you cannot make changes to it. However, under the Uniform Trust Code (UTC) and decanting provisions in some states, you may be able to make some changes. Still, you should read the trust document carefully before you sign it.
  • When should I set up an insurance trust?
    You can set up one at any time, but because the trust is irrevocable many people wait until they are in their 50s or 60s. By then, family relationships have usually settled. Just don't wait too long; you could become uninsurable. And remember, if you transfer existing policies to the trust, you must live three years after the transfer for it to be valid.
  • Should I seek professional assistance?
    Yes. If you think an irrevocable insurance trust would be of value to you and your family, talk with an insurance professional, estate planning attorney, corporate trustee, or CPA who has experience with these trusts.
  • Benefits of a Life Insurance Trust
    • Provides immediate cash to pay estate taxes and other expenses after death.
    • Reduces estate taxes by removing insurance from your estate.
    • Inexpensive way to pay estate taxes.
    • Proceeds avoid probate and are free from income and estate taxes.
    • Gives you maximum control over insurance policy and how proceeds are used.
    • Can provide income to spouse without insurance proceeds being included in spouse's estate.
    • Prevents court from controlling insurance proceeds if beneficiary is incapacitated.
  • Overview
    If you have been named as a trustee or successor trustee for someone's living trust, you may be wondering what you are supposed to do. Successor trustees can relax a bit, because you don't do anything right now. You will only begin to act when the person becomes unable to manage his or her financial affairs due to incapacity, or when he or she dies. If you have been named as a trustee, you may already be acting in that capacity.

    In either case, it is important that you understand your duties and responsibilities. These FAQs will help. Let's start with some explanations.
  • What is a trust?
    A trust is a legal entity that can "own" assets. The document looks much like a will. And, like a will, a trust includes instructions for whom you want to handle your final affairs and whom you want to receive your assets after you die. There are different kinds of trusts: testamentary (created in a will after someone dies); irrevocable (usually cannot be changed); and revocable living trusts.

    Today, many people use a revocable living trust instead of a will in their estate plan because it avoids court interference at death (probate) and at incapacity. It is also flexible. As long as you are alive and competent, you can change the trust document, add or remove assets, even cancel it.
  • How does a living trust work?
    For a living trust to work properly, you must transfer your assets into it. Titles must be changed from your "individual" name to the name of your trust. Because your name is no longer on the titles, there is no reason for the court to get involved if you become incapacitated or when you die. This makes it very easy for someone (a trustee or successor trustee) to step in and manage your financial affairs.
  • Who are the people involved with a living trust?
    The grantor (also called settlor, trustor, creator or trustmaker) is the person whose trust it is. Married couples who set up one trust together are co-grantors of their trust. Only the grantor(s) can make changes to his or her trust.

    The trustee manages the assets that are in the trust. Many people choose to be their own trustee and continue to manage their affairs for as long as they are able. Married couples are often co-trustees, so that when one dies or becomes incapacitated, the surviving spouse can continue to handle their finances with no other actions or steps required, including court interference.

    A successor trustee is named to step in and manage the trust when the trustee is no longer able to continue (usually due to incapacity or death). Typically, several are named in succession in case one or more cannot act. Sometimes two or more adult children are named to act together. Sometimes a corporate trustee (bank or trust company) is named. Sometimes it is a combination of the two.

    The beneficiaries are the persons or organizations who will receive the trust assets after the grantor dies.
  • What do I need to know now?
    The grantor should make you familiar with the trust and its provisions. You need to know where the trust document, trust assets, insurance policies (medical, life, disability, long term care) and other important papers are located. However, don't be offended if the grantor does not want to show you values of the trust assets; some people are very private about their finances. This would be a good time to make sure appropriate titles and beneficiary designations have been changed to the trust. (Some assets, like annuities and IRAs, will list the trust as a contingent beneficiary.)

    You also need to know who the trustees are, who successor trustees are, the order in which you are slated to act, and if you will be acting alone or with someone else.
  • What responsibilities will I have as a trustee?
    The most important thing to remember when you step in as trustee is that these are not your assets. You are safeguarding them for others: for the grantor (if living) and for the beneficiaries, who will receive them after the grantor dies.

    As a trustee, you have certain responsibilities. For example:
    • You must follow the instructions in the trust document.
    • You cannot mix trust assets with your own. You must keep separate checking accounts and investments.
    • You cannot use trust assets for your own benefit (unless the trust authorizes it).
    • You must treat trust beneficiaries the same; you cannot favor one over another (unless the trust says you can).
    • Trust assets must be invested in a prudent (conservative) manner, in a way that will result in reasonable growth with minimum risk.
    • You are responsible for keeping accurate records, filing tax returns and reporting to the beneficiaries as the trust requires.
  • Do I have to do all of this myself?
    No, of course not. You can have professionals help you, especially with the accounting and investing. You will also probably need to consult with an attorney from time to time. However, as trustee, you are ultimately responsible to the beneficiaries for prudent management of the trust assets.
  • How will I know if the grantor is incapacitated?
    Usually the trust document contains instructions for determining the grantor's incapacity. The trust may require one or more doctors to certify the grantor is not physically or mentally able to handle his or her financial affairs.
  • What do I do if the grantor is incapacitated? (Part 1)
    If all assets have been transferred to the trust, you will be able to step in as trustee and manage the grantor's financial affairs quickly and easily, with no court interference.

    First, make sure the grantor is receiving quality care in a supportive environment. Give copies of health care documents (medical power of attorney, living will, etc.) to the physician. If someone has been appointed to make health care decisions, make sure he or she has been notified. Offer to help notify the grantor's employer, friends and relatives.

    Next, find and review the trust document. (Hopefully, you already know where it is.) Notify any co-trustees as soon as possible. Also, notify the attorney who prepared the trust document; he or she can be very helpful if you have questions. You may want to meet with the attorney to review the trust and your responsibilities. The attorney can also prepare a certificate of trust, a shortened version of the trust that also proves you have legal authority to act.

    You will want to become familiar with the grantor's insurance (medical and long term care, if any) and understand the benefits and limitations. Assuming the insurance will cover a certain procedure or facility could be a costly mistake.

    Have the doctor(s) document the incapacity as required in the trust document. Banks and others may ask to see this and a certificate of trust before they let you transact business.
  • What do I do if the grantor is incapacitated? (Part 2)
    If there are minors or other dependents, you will need to look after their care. The trust may have specific instructions. If the grantor's incapacity is expected to be lengthy, a guardian (of the person, not assets) may need to be appointed by the court. The attorney can help you with this.

    Become familiar with the finances. You need to know what the assets are, where they are located and their current values. You also need to know where the income comes from, how much it is and when it is paid, as well as regular ongoing expenses. You may need to put together a budget.

    If you cannot readily find this information, others (family members, banker, employer, accountant) may be able to help you. Last year's tax returns may be helpful. Also, if you discover any assets that were left out of the trust, the attorney can help you determine if they need to be put into the trust and can then assist you.

    Apply for disability benefits through the grantor's employer, social security, private insurance and veteran's services. Notify the bank and other professionals that you are now the trustee for this person. Put together a team of professionals (attorney, accountant, banker, insurance and financial advisors) to help you. Be sure to consult with them before you sell any assets.

    Now you can start to transact any necessary business. You can receive and deposit funds, pay bills and, in general, use the person's assets to take care of him or her and any dependents until recovery or death.

    You'll need to keep careful records of medical expenses and file claims promptly. Keep a ledger of income received and bills paid. An accountant can show you how to set up these records properly. The trust may require you to send accountings to the beneficiaries. Also, don't forget income taxes (due April 15) and property taxes.
  • What happens if the grantor recovers?
    You go back to being a co-trustee or successor trustee and the grantor resumes taking care of his or her own financial affairs. It's very easy, and there is no court involvement.
  • What do I do when the grantor dies? (Part 1)
    You will have essentially the same duties as an executor named in a will would have. But if all titles and beneficiary designations have been changed to the grantor's trust, the probate court will not be involved. That means you will be able to act on your schedule instead of the court's.

    The trustee is responsible for seeing that everything is done properly and in a timely manner. You may be able to do much of this yourself, but an attorney, corporate trustee and/or accountant can give you valuable guidance and assistance. Here's an overview of what needs to be done.

    Inform the family of your position and offer to assist with the funeral. Read the trust document and look for specific instructions. Notify a co-trustee as soon as possible.

    Make an appointment with an attorney to go over the trust document, trust assets and your responsibilities as soon as possible. Do not sell or distribute any assets before you meet with the attorney.

    Before the meeting, make a preliminary list of the assets and their estimated values. You'll need exact values later, but this will help the attorney know if an estate tax return will need to be filed (due no later than nine months after the grantor's death). If there is a surviving spouse or if the trust has a tax planning provision, the attorney may need to do some tax planning right away. The trust may also need its own tax identification number.

    Collect all death benefits (social security, life insurance, retirement plans, associations) and put them in an interest bearing account until assets are distributed. If the surviving spouse or other beneficiary needs money to live on, you can probably make some partial distributions. But do not make any distributions until after you have determined there is enough money to pay all expenses, including taxes.
  • What do I do when the grantor dies? (Part 2)
    Notify the bank, brokerage firm and others of the grantor's death and that you are now trustee. They will probably want to see a certified death certificate (order at least 12), a certificate of trust and your personal identification.

    To finalize the list of assets, you will need exact values as of the date of the grantor's death. Some assets will need to be appraised. An estate sale may need to be held to dispose of household goods and personal effects.

    Keep careful records of final medical and funeral expenses, and file medical claims promptly. Keep a ledger of bills and income received. Contact an accountant and attorney to prepare final income and estate tax returns, if required. Verify and pay all bills and taxes. Make a final accounting of assets and bills paid, and give it to the beneficiaries.

    If the assets are to be fully distributed, you will divide the cash and transfer titles according to the instructions in the trust. That's it...you're finished and the trust is dissolved.

    If the assets are to stay in a trust (for minors, for a surviving spouse, for tax purposes or if the beneficiaries will receive their inheritances in installments), each trust will need a new tax identification number, and proper bookkeeping and reporting procedures will need to be established.
  • Should I be paid for all this work?
    Yes, trustees are entitled to reasonable compensation for their services. The trust document should give guidelines.
  • What if the responsibilities are too much for me?
    Consider hiring an attorney, bookkeeper, accountant or corporate trustee to help you. (A corporate trustee can manage the investments and do the recordkeeping.) If you feel you cannot handle any of the responsibilities due to work, family demands or any other reason, you can resign and let the next successor trustee step in. If no other successor trustee has been named, or none is willing or able to serve, a corporate trustee can usually be named.
  • What Does The Trustee Do At Incapacity?
    • Oversees care of ill person
    • Understands insurance benefits and limitations
    • Looks after care of any minors and dependents
    • Applies for disability benefits
    • Puts together team of advisors
    • Notifies bank and others
    • Transacts necessary business
    • Keeps accurate records and accounting
  • What Does The Trustee Do At Death?
    • Contacts attorney to review trust and process
    • Keeps beneficiaries informed
    • Puts together team of advisors
    • Inventories assets, determines current values
    • Makes partial distributions if needed
    • Collects benefits, keeps records, files tax returns
    • Pays bills, does final accounting
    • Distributes assets to beneficiaries as trust directs
  • Glossary of Terms (A-B)
    A Trust
    The surviving spouse’s portion of an A-B trust. Also called marital trust or survivor’s trust.

    A-B Trust
    A trust that includes a tax-planning provision that lets you provide for your surviving spouse and keep control over who will receive your assets after your spouse dies. It also lets both spouses use their federal estate tax exemptions. This can save a substantial amount in estate taxes and leave more money for your beneficiaries.

    Administration
    The court-supervised distribution of an estate during probate. Also used to describe the same process for a trust after the grantor dies.

    Administrator
    Person named by the court to represent a probate estate when there is no will or the will did not name an executor. Female is administratrix. Also called personal representative.

    Alternate Beneficiary
    Person or organization named to receive your assets if the primary beneficiaries named in your Trust die before you do.

    Ancillary Administration
    An additional probate in another state. Typically required when you own real estate in another state that is not titled in the name of your trust.

    Annual Exclusion
    Amount you can give someone each year without having to file a gift tax return or pay a gift tax. Currently $13,000 per recipient ($26,000 if married). The amount of tax-free gifts is tied to inflation and may increase from time to time.

    Assets
    Basically, anything you own, including your home and other real estate, bank accounts, life insurance, investments, furniture, jewelry, art, clothing, and collectibles.

    Assignment
    A short document that transfers your interest in assets from your name to another. Often used when transferring assets to a trust.

    B Trust
    The deceased spouse’s portion of an A-B trust. Also called credit shelter or bypass trust.

    Basis
    What you paid for an asset. The value that is used to determine gain or loss for income tax purposes.

    Beneficiaries
    In a living trust, the persons and/or organizations who receive the trust assets (or benefit from the trust assets) after the death of the trust grantor.

    By-Pass Trust
    Another name for the "B" part of an A-B living trust because the assets in this trust bypass federal estate taxes.
  • Glossary of Terms (C)
    C Trust
    See "QTIP."

    Certificate of Trust
    A shortened version of a trust that verifies the trust’s existence, explains the powers given to the trustee, and identifies the successor trustee(s). Does not reveal any information about the trust assets, beneficiaries, or their inheritances.

    Children’s Trust
    A trust included in your living trust. If, when you die, a beneficiary is not of legal age, the child’s inheritance will go into this trust. The inheritance will be managed by the trustee you have named until the child reaches the age at which you want him/her to inherit.

    Codicil
    A written change or amendment to a Will.

    Co-Grantors
    Two or more persons who establish one living trust together.

    Co-Trustees
    Two or more individuals who have been named to act together in managing a trust’s assets. A corporate trustee can also be a co-trustee.

    Common Trust
    One living trust established by two or more individuals (usually a married couple).

    Community Property
    Assets a husband and wife acquire by joint effort during marriage if they live in one of the eight community property states. (Wisconsin also has a similar law, but does not use the term "community property.") Each spouse owns half of the assets in the event of divorce or death.

    Conservator
    One who is legally responsible for the care and well-being of another person. If appointed by a court, the conservator is under the court’s supervision. May also be called a guardian. (Duties and titles can vary by state. For example, in Missouri, there is a guardian of the person and a conservator of the estate.)

    Conservatorship
    A court-controlled program for persons who are unable to manage their own affairs due to mental or physical incapacity. May also be called a guardianship.

    Contest
    To dispute or challenge the terms of a will or trust.

    Corporate Trustee
    An institution, generally a bank or trust company, that specializes in managing trusts.

    Credit Shelter Trust
    Another name for the B Trust in an A-B living trust because this trust "shelters" or preserves the federal estate tax "credit" of the deceased spouse.

    Creditor
    Person or institution to whom money is owed.

    Custodian
    Person named to manage assets left to a minor under the Uniform Transfer to Minors Act. In most states, the minor receives the assets at legal age.
  • Glossary of Terms (D-G)
    Deceased
    One who has died.

    Deed
    A document that lets you transfer title of your real estate to another person(s). Also see warranty deed and quitclaim deed.

    Disclaim
    To refuse to accept a gift or inheritance so it can go to the recipient who is next in line.

    Discretion
    The full or partial power to make a decision or judgment.

    Disinherit
    To prevent someone from inheriting from you.

    Distribution
    Payment in cash or asset(s) to one who is entitled to receive it.

    Durable Power of Attorney for Asset Management
    A legal document that gives another person full or limited legal authority to sign your name on your behalf in your absence. Valid through incapacity. Ends at death.

    Durable Power of Attorney for Health Care
    A legal document that lets you give someone else the authority to make health care decisions for you in the event you are unable to make them for yourself. Also called a health care proxy or medical power of attorney.

    Equity
    The current market value of an asset less any loan or liability.

    Estate
    Assets and debts left by an individual at death.

    Estate Taxes
    Federal or state taxes on the value of assets left at death. Also called inheritance taxes or death taxes.

    Executor
    Person or institution named in a will to carry out its instructions. Female is executrix. Also called a personal representative.

    Federal Estate Tax Exemption
    Amount of an individual's estate that is exempt from federal estate taxes. In 2012, the exemption is $5,120,000. If Congress does not act by the end of 2012, on January 1, 2013 the exemption will be $1 million.

    Fiduciary
    Person having the legal duty to act primarily for another’s benefit. Implies great confidence and trust, and a high degree of good faith. Usually associated with a trustee.

    Funding
    The process of transferring assets to your living trust.

    Gain
    The difference between what you receive for an asset when it is sold and what you paid for it. Used to determine the amount of capital gains tax due.

    Generation Skipping Transfer Tax (GSTT)
    A steep tax on assets that "skip" a generation and are left directly to grandchildren and younger generations. In 2012, the GST exemption is the same as the federal estate tax exemption (double for a married couple) with a tax rate of 35%. If Congress does not act before the end of 2012, on January 1, 2013 the GST exemption will be $1 million with a top tax rate of 55%.

    Gift
    A transfer from one individual to another without fair compensation.

    Gift Tax
    A federal tax on gifts made while you are living. Currently $13,000 per person per year is exempt from gift tax. Also see "Annual Exclusion."

    Grantor
    The person who sets up or creates the trust. The person whose trust it is. Also called creator, settlor, trustor, donor or trustmaker.

    Gross Estate
    The value of an estate before debts are paid.

    Guardianship
    See "Conservatorship."
  • Glossary of Terms (H-N)
    Health Care Proxy
    See "Durable Power of Attorney for Health Care."

    Heir
    One who is entitled by law to receive part of your estate.

    Holographic Will
    A handwritten will.

    Homestead Exemption
    Portion of your residence (dwelling and surrounding land) that cannot be sold to satisfy a creditor’s claim while you are living.

    Incapacitated/ Incompetent
    Unable to manage one’s own affairs, either temporarily or permanently. Lack of legal power.

    Independent Administration
    A form of probate available in many states. Intended to simplify the probate process by requiring fewer court appearances and less court supervision.

    Inheritance
    The assets received from someone who has died.

    Inter vivos
    Latin term that means "between the living." An inter vivos trust is created while you are living instead of after you die. A revocable living trust is an inter vivos trust.

    Irrevocable Trust
    A trust that cannot be changed (revoked) or cancelled once it is set up. Opposite of revocable trust.

    Intestate
    Without a will.

    Joint Ownership
    A form of ownership in which two or more persons own the same asset together. Types of joint ownership include joint tenants with right of survivorship, tenants in common, and tenants by the entirety.

    Joint Tenants with Right of Survivorship
    A form of joint ownership in which the deceased owner’s share automatically and immediately transfers to the surviving joint tenant(s).

    Land Trust
    Often used for privacy. Title is transferred to a corporate trustee or corporation, but you keep control over how the property is managed. Because the title is in the name of the corporate trustee or corporation, no one knows the property belongs to you. In all financial transactions and dealings, your personal name never comes up. Also called a title holding trust.

    Liquid Assets
    Cash and other assets (like stocks) that can easily be converted into cash.

    "Living Probate"
    The court-supervised process of managing the assets of one who is incapacitated.

    Living Trust
    A written legal document that creates an entity to which you transfer ownership of your assets. Contains your instructions for managing your assets during your lifetime and for their distribution upon your incapacity or death. Avoids probate at death and court control of assets at incapacity. Also called a revocable inter vivos trust. A trust created during one’s lifetime.

    Living Will
    A written document that states you do not wish to be kept alive by artificial means when the illness or injury is terminal.

    Marital Deduction
    A deduction on the federal estate tax return that lets the first spouse to die leave an unlimited amount of assets to the surviving spouse free of estate taxes. However, if no other tax planning is used, and the surviving spouse’s estate is more than the amount of the federal estate tax exemption in effect at the time of his/her death, estate taxes will be due at that time.

    Marital Trust
    See "A Trust."

    Medicaid
    A federally-funded health care program for the poor and minor children.

    Medicare
    A federally-funded health care program, primarily for Americans over age 65 who are covered by Social Security or Railroad Retirement benefits.

    Minor
    One who is under the legal age for an adult, which varies by state (usually age 18 or 21).

    Net Estate
    The value of an estate after all debts have been paid. (Federal estate taxes are based on the net value of an estate.)

    Net Value
    The current market value of an asset less any loan or debt.
  • Glossary of Terms (P-R)
    Payable-on-Death Account
    See "Totten Trust."

    Per Capita
    A way of distributing your estate so that your surviving descendents will share equally, regardless of their generation.

    Per Stirpes
    A way of distributing your estate so that your surviving descendents will receive only what their immediate ancestor would have received if he/she had been living at your death.

    Personal Property
    Movable property. Includes furniture, automobiles, equipment, cash and stocks. Opposite of real property that is permanent (like land).

    Personal Representative
    Another name for an executor or administrator.

    Pour Over Will
    A short will often used with a living trust. It states that any assets left out of your living trust will become part of (pour over into) your living trust upon your death.

    Power of Attorney
    A legal document giving someone legal authority to sign your name on your behalf in your absence. Ends at incapacity (unless it is a durable power of attorney) or death.

    Probate
    The legal process of validating a will, paying debts, and distributing assets after death.

    Probate Estate
    The assets that go through probate after you die. Usually these include assets you own in your name and those paid to your estate. Usually does not include assets owned jointly, payable-on-death accounts, insurance and other assets with beneficiary designations. Assets in a trust also do not go through probate.

    Probate Fees
    Legal, executor, and appraisal fees and court costs when an estate goes through probate. Probate fees are paid from assets in the estate before the assets are fully distributed to the heirs.

    Qualified Domestic Trust (QDOT)
    Allows a non-citizen spouse to qualify for the marital deduction.

    Qualified Terminable Interest Property (QTIP)
    A trust that delays estate taxes until your surviving spouse dies so more income will be available to provide for your spouse during his/her lifetime. You can also keep control over who will receive these assets after your spouse dies.

    Qualifying Subchapter S Trust (QSST)
    Trust that meets certain IRS qualifications and is allowed to own Subchapter S stock.

    Quitclaim Deed
    Document that allows you to transfer title to real estate. With a quitclaim deed, the person transferring the title makes no guarantees, but transfers all his/her interest in the property.

    Real Property
    Land and property that is permanently attached to land (like a building or a house).

    Recorded Deed
    A deed that has been filed with the county land records. This creates a public record of all changes in ownership of property in the state.

    Revocable Trust
    A trust in which the person setting it up retains the power to change (revoke) or cancel the trust during his/her lifetime. Opposite of irrevocable trust.

    Required Beginning Date (RBD)
    The date you must begin taking required minimum distributions from your tax-deferred plans. Usually, it is April 1 of the calendar year following the calendar year in which you turn age 70 1/2. If your money is in a company-sponsored plan, you may be able to delay your RBD beyond this date if you continue working (providing you are not a 5% or greater owner of the company).

    Required Minimum Distribution (RMD)
    The amount you are required to withdraw each year from your tax-deferred plan after you reach your Required Beginning Date. This amount is determined by dividing the year-end value of your tax-deferred account by a life expectancy divisor found on a chart provided by the IRS.
  • Glossary of Terms (S)
    Separate Property
    Generally, all assets you acquire prior to marriage and assets acquired by gift or inheritance during marriage.

    Separate Trust
    A trust established by one person. A married couple has separate trusts if each spouse has his/her own trust with its own assets. In contrast, see "Common Trust."

    Settle an Estate
    The process of handling the final affairs (valuation of assets, payment of debts and taxes, distribution of assets to Beneficiaries) after someone dies.

    Settlor
    See "Grantor."

    Special Gifts
    A separate listing of special assets that will go to specific individuals or organizations after your incapacity or death. Also called special bequests.

    Special Needs Trust
    Allows you to provide for a disabled loved one without interfering with government benefits.

    Spendthrift Clause
    Protects assets in a trust from a beneficiary’s creditors.

    Spouse
    Husband or wife.

    Stepped-up Basis
    Assets are given a new basis when transferred by inheritance (through a will or trust) and are re-valued as of the date of the owner’s death. If an asset has appreciated above its basis (what the owner paid for it), the new basis is called a stepped-up basis. A stepped-up basis can save a considerable amount in capital gains tax when an asset is later sold by the new owner. Also see "Basis."

    Subchapter S Corporation Stock
    Stock in a corporation which has chosen to be subject to the rules of subchapter S of the Internal Revenue Code.

    Surviving Spouse
    The spouse who is living after one spouse has died.

    Survivor’s Trust
    See "A Trust."

    Successor Trustee
    Person or institution named in the trust document who will take over should the first trustee die, resign, or otherwise become unable to act.
  • Glossary of Terms (T-Z)
    Tax-Deferred Plan
    A retirement savings plan (like an IRA, 401(k), pension, profit sharing, or Keogh) that qualifies for special income tax treatment. The contributions made to the plan and subsequent appreciation of the assets are not taxed until they are withdrawn at a later time -- ideally, at retirement, when your income and tax rate are lower.

    Taxable Gift
    Generally, a gift of more than $13,000 in one year to someone other than your spouse. The value of the taxable gift is applied to your federal gift tax exemption. After you have used up your exemption, additional gifts will be taxed, usually at the highest estate tax rate in effect. In 2012, the gift tax exemption is the same as the federal estate tax exemption and the tax rate is 35%. If Congress does not act before the end of 2012, on January 1, 2013 the exemption will be $1 million and the tax rate will be 55%.

    Tenants-in-Common
    A form of joint ownership in which two or more persons own the same property. At the death of a tenant-in-common, his/her share transfers to his/her heirs.

    Tenants-by-the Entirety
    A form of joint ownership in some states between husband and wife. When one spouse dies, his/her share of the asset automatically transfers to the surviving spouse.

    Testamentary Trust
    A trust in a will. Can only go into effect at death. Does not avoid probate.

    Testate
    One who dies with a valid will.

    Title
    Document proving ownership of an asset.

    Transfer Tax
    Tax on assets when they are transferred to another. The estate tax, gift tax and generation skipping transfer tax are all transfer taxes.

    Trust
    An entity that holds assets for the benefit of certain other persons or entities.

    Trust Company
    An institution that specializes in managing trusts. Also called a corporate trustee.

    Trustee
    Person or institution who manages and distributes another’s assets according to the instructions in the trust document.

    Trustor
    See "Grantor."

    Totten Trust
    A "pay-on-death" account. A bank account that will transfer to the beneficiary who was named when the account was established. The terms "transfer on death" ("TOD"), "in trust for" ("ITF"), "as trustee for" ("ATF"), and "pay on death" ("POD") often appear in the title.

    Unified Credit
    The amount each person is allowed to deduct from federal estate taxes owed after death. In 2012, the credit is $1,772,800. This is the amount of estate taxes that would be due on $5,120,000 in net assets. After applying this credit, the result is that $5,120,000 is "exempt" from estate taxes in 2012.

    Uniform Transfer to Minors Act (UTMA)
    Law enacted in many states that lets you leave assets to a minor by appointing a custodian. In most states, the minor receives the assets at legal age.

    Unfunded
    Your living trust is unfunded if you have not transferred assets into it.

    Warranty Deed
    Document that allows you to transfer title to real estate. With a warranty deed, the person guarantees that the title being transferred is clear (free of any encumbrances). If the title is defective, the person making the transfer is liable. Compare to quitclaim deed.

    Will
    A written document with instructions for disposing of assets after death. A will can only be enforced through the probate court.

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