Category: Conduit Trust

Trusts from A to Z

Many folks assume that trust funds are only for the rich, however, people in all types of economic circumstances may see a benefit from them. A trust fund is a special legal arrangement that lets a benefactor arrange for certain assets to go to someone else. 11-04-16

Motley Fool’s recent article, “Navigating the World of Trust Funds: Your Quick Guide,” explains that there are various types of trust funds that can serve as useful estate-planning tools. Here’s a rundown of revocable or irrevocable trusts, credit shelter trusts, generation-skipping trusts, and qualified personal-residence trusts.

Revocable trusts. Also known as a revocable living trust, this trust lets you manage your trust during your lifetime. In creating the trust, you can name yourself as the trustee in charge of overseeing its assets. This lets you move assets in and out of the trust as you want or even terminate the trust if your circumstances change. There’s a good deal of flexibility, and a major benefit is that they have the ability to bypass probate. Depending on where you live, probate can be lengthy and expensive. A revocable trust can also reduce the estate tax burden on your beneficiaries.

Irrevocable trusts. This is the opposite of a revocable trust. It can't be altered or terminated without the consent of the trustee and the trust's beneficiaries (and perhaps a judge). When you place assets into an irrevocable trust, you may no longer have any rights to them. The big benefit is saving money on estate taxes. When you transfer assets into an irrevocable trust, they're no longer yours and are excluded from your estate's value for tax purposes. Also, trust assets may be more difficult to access by creditors or anyone who initiates a lawsuit against you. And if you hold assets that you think will really appreciate over time, you can transfer those assets into the trust to remove them from your taxable estate and ensure that any future appreciation on them isn't subject to estate taxes. It’s a serious long-term commitment and may be a good option if you have a larger estate.

Credit shelter trusts. This trust can help wealthy married couples lower their estate taxes by maximizing federal and state exemptions. If you set up a credit shelter trust, the assets in that trust will be transferred to your beneficiaries upon your death, but your spouse can keep his or her rights to the assets contained in the trust for the rest of his or her life. Ultimately, however, those assets won't be counted as part of your spouse's estate. This helps your family take advantage of available tax exemptions. With portability, this trust may not be as useful as it once was. Portability lets the first spouse who dies transfer his or her assets along with the "unused" estate tax exclusion amount to the surviving spouse, who can then apply this enhanced exclusion amount in his or her own estate.

Generation-skipping trusts. This trust is established for the benefit of your grandchildren, as opposed to your children. These trusts are used to avoid estate taxes: if your children inherit your estate directly, then the value of your estate is added to the value of their estate and this could potentially trigger estate taxes when they die. By skipping your children’s generation you may be able to transfer more assets to your family than to the IRS over the long term. The generation-skipping trust is subject to taxes, but it can be structured to reduce estate taxes, allowing affluent families to preserve their wealth for future generations. A big advantage of generation-skipping trusts is that they can help avoid generation-skipping transfer tax.

Qualified personal residence trusts. This trust lets you leave your home to your beneficiaries and decrease your estate taxes. You can transfer your property by deed into the trust while retaining the right to live there for a certain period of time. Once that’s over, your beneficiaries can inherit your home, paying taxes on the value of the home at the time of the deed transfer. A qualified personal residence trust can be useful in locking in a lower value for gift tax purposes. And you can claim a lower value of the gift for your beneficiaries based on their delay in actually receiving the property. But if you die while living in your home, it’ll count as part of your estate and be taxed according to its value at that time.

Trust funds can be a big element in your estate-planning strategy, so talk with a qualified trust attorney to see which type of trust is best for you.

Reference: Motley Fool (Sept. 18, 2016) “Navigating the World of Trust Funds: Your Quick Guide”

An IRA Trust Might Be Preferred Over Naming Individuals or a Revocable Living Trusts as the IRAs Beneficiaries

If you maxed out your work 401(k) by taking advantage of matching funds and rolled this to an IRA when you retired, you might not need all of that money—especially if you are a spouse with a pension and Social Security. One thought is to designate children or grandchildren as primary beneficiaries of the IRA. However, you don’t want them to be able to withdraw more than the required distribution based on their life expectancy. 9-20-2016

The Charlotte News-Observer’s article, “To ‘rule from the grave,’ establish an IRA trust,” suggests that you speak with a qualified estate planning attorney and explore the benefits of establishing an IRA standalone trust—which is also known as an "IRA trust,” an “IRA stretch trust” or an “IRA protection trust.”

This type of trust is approved by the IRS and may be more advantageous than designating individual children or grandchildren—or naming revocable living trusts as beneficiaries of IRAs. If you name your revocable living trust as a beneficiary, you must be certain that it has the appropriate conduit-trust language and that the wording of the beneficiary designation is correct to take advantage of the stretch-out of the required minimum distributions (RMDs).

Remember that if you go ahead and designate individuals as beneficiaries, you may create some headaches for them—including requiring a guardian to request permission from the courts to make distributions if the beneficiary is a minor. Also, the beneficiary may take higher distributions than necessary—often leading to increased taxation, eliminating the value of tax-free compounding and possibly running out of money. If the beneficiary is disabled, there is a risk of potentially losing needs-based government benefits. Other potential issues include the loss of control as to who will ultimately inherit the IRA after the death of the primary beneficiary and—if the beneficiary is not the spouse—the IRA being fair game for creditors.

Typically, a surviving spouse beneficiary can make the IRA his or her own and take RMD based on his or her life expectancy. The RMD doesn’t need to begin until the spouse reaches age 70 ½ or April 1 of the following year. An IRA inherited by a spouse and converted to his or her own IRA will still be protected from creditors from personal injury lawsuits, bankruptcy and the like. Distributions from an IRA inherited by a non-spouse are required to commence the year after the death of the IRA owner. The RMD is based on the beneficiary’s life expectancy.

A non-spouse inherited IRA isn’t protected in bankruptcy and may be hit with the claims of the beneficiary’s creditors. But the assets in a standalone IRA trust are protected by trust law, and they’re also protected from creditors. The trust can also control distributions so that they’re limited to the RMD based on the beneficiary’s life expectancy. That will defer the payment of income tax within the IRA, providing the greatest “stretch-out” of benefits to the beneficiary.

Your estate planning attorney can help you decide if the trust should be a conduit or an accumulation trust. The RMDs have to be distributed to the beneficiary in a conduit trust, but with an accumulation trust, RMDs may be accumulated in the trust. The accumulation trust is better if you require additional protection for the beneficiary who’s in a bad marriage, a high-risk profession, has addictions or has special needs.

It's a very complex issue. Again, work with a qualified estate attorney to create a sound action plan based on your personal situation and objectives.

Reference: Charlotte News-Observer (July 30, 2016) “To ‘rule from the grave,’ establish an IRA trust”