Category: Tax-Deferred Plans

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”

Proposed Regs Aim to Place Restrictions on Valuation Discount Planning

According to the regulations.gov post “Estate, Gift, and Generation-skipping Transfer Taxes: Restrictions on Liquidation of an Interest,” the Treasury Department and the IRS have proposed regulations that would amend §?25.2701-2 to address what constitutes control of an LLC or other entity or arrangement that isn’t a corporation, partnership or limited partnership. 10-14-16

These regs would amend §?25.2704-1 to address deathbed transfers that result in the lapse of a liquidation right and to clarify the treatment of a transfer that results in the creation of an assignee interest. The changes would refine the definition of “applicable restriction.” It eliminates the comparison to the liquidation limitations of state law. It would also add a new section to address restrictions on the liquidation of an individual interest in an entity and the effect of insubstantial interests held by persons who are not members of the family.

If and when finalized, the proposed regulations would do the following:

  • Treat a lapse of voting and liquidation rights for transfers made within three years of death of interests in a family-controlled entity as an additional transfer, eliminating or limiting the lack of control and minority discounts for these transfers;
  • Eliminate discounts based on the transferee’s status as an assignee and not a full owner and participant in the entity;
  • Disregard the ability of most nonfamily member owners to block the removal of covered restrictions, unless he or she has held the interest for more than three years, owns a substantial interest in the entity and has the right—with six months’ notice—to be redeemed or bought out for cash or property—not including a promissory note issued by the entity, its owners or anyone related to the entity or its owners;
  • Disregard restrictions on liquidation that aren’t mandated by law in determining the fair market value of the transferred interest; and
  • Clarify the description of entities covered to include LLCs and other entities and business arrangements—as well as corporations and partnerships.

If these end up being the final regulations, taxpayers will lose an important estate planning technique, and the tax cost of transferring interests in family-owned entities will increase.

Reference: regulations.gov (August 4, 2016) “Estate, Gift, and Generation-skipping Transfer Taxes: Restrictions on Liquidation of an Interest”

Secure Intellectual Property Rights for Your Estate

Are you an inventor, an author, artist or the owner of a closely held business? If so, you may have already taken action to secure your intellectual property rights. Certain types of intellectual property—like business ideas, visual art, published or unpublished literary and musical works, inventions, computer programs, clothing design and architecture—may be protected by federal law through copyrights, patents and trademarks. 10-12-16

The Sabetha (KS) Herald’s article, “Estate planning for intellectual property,” suggests that, initially, it is important to determine whether the intellectual property can be passed down to your heirs. Some types of intellectual property may have renewal or termination rights, which can create questions as to when intellectual property right owners elect a second executor to handle intellectual property issues in their estates. In addition, the valuation of intellectual property is a challenge for estate planning.

Estate tax impacts those with substantial assets, regardless of the type of property included in the estate. Similar to an executor being forced to sell a family vacation home to pay the estates taxes, a well-known author may worry that future publication rights to unpublished works will need to be sold in the same manner after his or her death.

Proper estate planning is critical to make certain that the decedent’s wishes are carried out. One idea is a life insurance policy purchased and owned by an Irrevocable Life Insurance Trust (ILIT). If structured and administered correctly, an ILIT can provide cash at death to help satisfy obligations like estate taxes. It can give some flexibility to an estate with only a small amount of liquid assets.

Estate planning for intangible assets like intellectual property has many complicated considerations. Make sure to speak with a qualified estate planning attorney to help ensure the ultimate distribution of your assets according to your wishes.

Reference: Sabetha (KS) Herald (August 24, 2016) “Estate planning for intellectual property”

The Do-It-Yourself Will Can Be a Bargain or a Bust

A majority of Americans (about 66%) don’t have a written will, and for most, it’s something they’ve postponed until later. It’s natural to think about assets as you age, and if you don’t have children or many assets, and you’re OK with your closest blood relative (a parent or sibling) getting your property outright, you can probably get away without having a will. But that’s not recommended. 10-10-2016

Money points out in “4 Things You Should Know Before You Make Your Own Will,” the definition of “closest blood relative” and the procedure of dividing your assets can vary significantly by state. So if you have some ideas as to where your assets should go, it’s worth the time and effort to develop a plan in writing. Sure, you can give it a go with a Do-It-Yourself. If you die without a will, it doesn’t matter what you wanted.

If you’re going to try the DIY route, you need to understand your state laws, such as the fact that in some states, a handwritten will may not require any witnesses. Only half of states accept these wills as legally binding. On the other hand, a newly typed will requires two witnesses’ signatures to be valid just about everywhere. However, an older typed will that was executed in a state like Vermont or Georgia, which used to require three witnesses, will be subject to the old requirements unless it’s updated. Starting to get a little complicated, yes?

You should also be aware of any state estate or inheritance tax. If your state has this, you need to prepare for it. About a half a dozen states impose an inheritance tax—that means your heirs who live in that state will have to pay. Another 12 states impose an estate tax, which gets paid on your overall assets (in addition to the federal estate tax).

A will doesn’t cover all of your assets. Anything in joint name or payable to a named beneficiary, like life insurance policies or 401(k)s, is outside the control of a will. You can create transfer-on-death or payable-on-death designations for checking, savings, and money market accounts; certificates of deposit; and U.S. bonds.

Once you’ve taken care of these items, you need to write out your intentions. Make sure you use the right language, like spelling out who you are and the purpose of the document. You should also be specific, like including full addresses when identifying the property and a complete description of personal property. In addition, use the full names of beneficiaries, not “my wife” or “my child.”

You also need to designate an executor you trust and let him or her know where to find your will. Name a secondary executor or a co-executor in the event that your first choice can’t carry out the task or predeceases you. Along those same lines, appoint a guardian for minor children.

Finally, the most difficult aspect of a DIY will is trying to think of all the contingencies. That’s where an estate planning attorney can really help you. While a handwritten will won’t cost you a penny, in most states, a will drafted by an attorney can cost a few hundred dollars. Think about this especially if you have a larger, more complex estate. There are important federal estate tax considerations.

Paying a little more now for a good, legally drafted will can save your heirs money, headaches, and heartache. This can be especially true when you have beneficiaries not designated by your state intestacy statutes. If your surviving family aren’t the designated successors, they may have to spend a significant amount of money fighting over the assets to which they’re entitled.

Reference: Money (August 17, 2016) “4 Things You Should Know Before You Make Your Own Will”