Personal Capital Review An Easier Way To Manage Your Finances Help Preserve Assets And Provide For Loved Ones With A Trust

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Help Preserve Assets And Provide For Loved Ones With A Trust

As part of your year-end planning exercise, take a moment to consider what will happen to your assets and surviving family if you are no longer able to care for them. Then consider the potential benefits of establishing a trust. Trusts are an effective way to protect important assets, provide for beneficiaries and help manage taxes. And, contrary to popular belief, trusts aren’t just for the wealthy.

A qualified attorney can help you easily set up a trust that can be used for any practical purpose, such as:

o Controlling assets and providing security for beneficiaries.

o Beneficiaries who are minors or who require expert assistance in managing money.

o Avoiding estate or income taxes.

o Providing expert management of assets.

o Avoid probate expenses.

o Maintain confidentiality.

o Protecting real estate holdings or businesses.

Trust Definitions – A Quick Primer

A trust is a legal arrangement in which you, the owner of the property and the grantor of the trust, transfer the legal title to that property to someone else – the trustee – to one or more third parties – for the purpose of benefiting the beneficiaries. The trustee, who can be an individual or a corporation, is given title to the property according to the terms of the trust agreement.

There are two general categories of trusts: revocable and irrevocable. Revocable trusts can be changed or “cancelled”. Irrevocable trusts cannot be changed once they are set up. Most revocable trusts are irrevocable upon the death or incapacity of the grantor. Assets you hold in an irrevocable trust are permanently removed from your estate. Income and capital gains taxes are paid by the trust on the assets held in the trust. At your death, the assets in the trust are not considered part of your estate and therefore are not subject to estate tax.

A trust for every purpose

There are many types of trusts – each serving specific needs and involving different tax and legal considerations. While a detailed discussion of the many types of trusts is beyond the scope of this article, the following is a brief review of some widely used trusts.

Living Trust. A living trust allows you to be both the trustee and the beneficiary of the trust while you are alive. You retain control of the property and receive all income and benefits. Upon your death, a designated successor trustee manages and/or distributes the remaining assets according to the terms set forth in the trust, bypassing the probate process. Living trusts are an ideal way to provide for the management of your financial affairs in the event of incapacity. You, not the court or an improperly motivated family member, choose who manages your finances.

Credit Shelter Trust. Married couples enjoy many protections when it comes to estate planning. For example, under the unlimited marital deduction, husbands and wives do not have to pay federal estate taxes on assets transferred to each other. This benefit works well until the death of the surviving spouse, at which point non-spousal beneficiaries (usually children) may face a significant federal estate tax bill on any amount exceeding the current estate tax exclusion ($2 million through 2008).

To avoid this problem, couples should include a credit shelter trust in their estate planning documents. With a credit shelter trust, you divide your assets into two parts. One portion is left to your spouse, and the other is held in a trust. Any amount left to your spouse is tax-free because of the unlimited marital deduction, while those in trusts — up to $2 million — are sheltered by the estate tax exemption.

When your spouse dies, the trust assets will go to your children or anyone else you named as a beneficiary. Trust assets will not be taxed as part of your spouse’s estate. Assets transferred directly to your spouse will go to a person chosen by your spouse. These assets will be included in your spouse’s estate for tax purposes, but your spouse’s own exemptions will offset some or all of the taxes. Using this planning technique, a couple can currently pass up to $4 million estate tax-free to their children or other beneficiaries.

Irrevocable Life Insurance Trust (ILIT). This type of trust is often used as an estate tax funding mechanism. Under this arrangement, you make gifts to an irrevocable trust, which uses those gifts to purchase your life insurance policy. Upon your death, the policy’s death benefit becomes payable to an income trust, which provides tax-free cash to help beneficiaries meet estate tax obligations.

Qualified Personal Residence Trust (QPRT). A QPRT allows you to remove your residence from your real estate at a discount. Under this arrangement, you get to use the home for a predetermined year, after which ownership is transferred to the trust or beneficiaries. Any gift tax you incur from giving away property is exempt because you still own the home during the years specified in the trust. A potential drawback is that if you die before the term of the trust expires, the house is considered part of your estate.

Charitable Trusts. To help benefit your favorite charity while serving your own trust objectives, you may want to consider a charitable lead trust (CLT) or charitable remainder trust (CRT). CRTs and CLTs are often described as mirror images of each other: CRTs provide an income stream payable to the donor, family member or other heir for a specified period, after which the remaining principal goes to charity. CLTs, in contrast, pay a stream of income to the charity for a period of years, after which the remainder is paid to named beneficiaries, usually family members.

Perhaps one of the greatest advantages of trusts is that they allow beneficiaries to enjoy asset ownership while reducing tax risk to those involved. Keep in mind that trusts are legal documents – an estate planning attorney can help explain the intricacies of specific trust arrangements.

This article is not intended to provide specific investment or tax and legal advice to any individual. If you have any questions consult your financial advisor, your tax advisor and a qualified attorney or me.

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