By ALAN S. NOVICK
Scripps Howard News Service
05-JUN-06
Trusts are most often created as a tax-saving device, but there are usually are many other advantages that become apparent as a plan for the trusted is drawn up.
Any disposition of property should be made only in relation to the entire estate plan, total assets and family objectives. In addition to tax savings, a trust may provide flexibility as to use of income and possible sales, mortgages and/or distribution of trust assets.
A trust may also be used to distribute or retain assets for later distribution to grandchildren. When there are special needs to be considered for one child due to his or her particular financial or medical situation, the trust format may be more suitable.
For older persons, a trust may be an important part of planning for long-term care and Medicaid eligibility.
For larger estates _ or estates where there are several parcels of real estate and where more flexibility is desired _ a revocable trust may be preferred as a vehicle to hold and then pass the assets through both of the parents' estates and ultimately to the children. A revocable trust (or "living trust") will provide the step-up in basis for all property owned by it and may also qualify for a state's homestead exemption for a residence.
The living trust may be used to take advantage of the marital deduction and to use up the owner's $2 million estate tax exemption. If the parents' total estates exceed $4 million, then a trust or two trusts could be used to take advantage of the $2 million estate tax exemption in both estates, and pass a total of up to $4 million to children without imposition of any estate tax.
The use of two trusts can result in savings of almost $1 million in estate taxes in such a case by transferring the $4 million dollars to the children without any estate tax being paid.
Such trusts are labeled marital deduction trusts and family trusts, and are generally "revocable" _ that is they can be changed or amended at any time.
In larger estates, it may also be desirable to use one or several kinds of irrevocable trusts to completely remove the value of trust property from estate taxation.
When life insurance or other assets will increase the size of an estate to $2 million or more, the use of an irrevocable trust should be considered.
The life insurance trust may be the owner, beneficiary or both the owner and beneficiary of the policy.
The main tax advantage of an irrevocable life insurance trust is that the proceeds of the policy may completely escape estate taxes if the trust owns the policy and if the trust is properly drafted.
Only a trust can be used to provide for the needs of a surviving spouse or children according to their needs. Only a trustee can determine their needs at the time.
Setting up a trust does involve legal expense, and after the trust is funded there will be trustees' fees.
The conveniences, discretionary powers and tax savings available will usually more than justify the expenses and provide for a better estate plan.
(Attorney Alan S. Novick is a wills, trusts and estates lawyer. E-mail estate planning questions to an304@aol.com.)
