18

Retirement Planning

Chapter 18 - Trusts

In the past few years, it has become increasingly common to attempt to cure everything connected with death through a revocable living trust. While a trust, both revocable and irrevocable, does have their place in estate and retirement planning, the trust is not a cure-all. A Consumer Reports book titled “How to Plan for a Secure Retirement” called the trust "the most complicated way of assigning someone the task of managing your money." Whatever truth this statement contains, there are some positive aspects to forming a living trust in the right circumstances.

For many people, a simple will is all that is needed to dispose of their assets at death. In fact, the will is the easiest and most suitable method in the majority of cases (despite what you were told by the company who is touting living trusts). For those estates where extenuating circumstances exist, however, a trust can be a valuable estate-planning tool.

There are two major reasons for setting up a living trust:

To manage assets

and

To save or minimize taxation (irrevocable trusts only).

Trusts come in many forms and all of them are designed to accomplish one or the other or both. Trusts have long been used to preserve family lands for future generations. They are still used today to control family fortunes.

Trusts are often used to provide funds for children, grandchildren and other relatives. For some people, the trust becomes the central feature of their estate plans. What many people fail to recognize when trusts are being sold to them is that they nearly always involve some expense and inconvenience. Sometimes the cheaper and easier will just makes more sense.

A trust is a legal arrangement under which one entity transfers ownership of assets to another entity. The entity may be a person or a corporation. Once these assets are transferred, a trustee then manages them for the benefit of yet a third entity, usually a person, although it can be an organization also. The third entity is the beneficiary. A trust created during the individual's lifetime (the individual being the trust creator) is called an inter vivos or living trust. A trust that is created under the will is called a testamentary trust. A few trusts have characteristics of both and are called combination trusts. Combination trusts are set up while the testator is alive, like inter vivos trusts, but they do not become effective, like testamentary trusts, until the testator has died. In fact, some types of insurance trusts are combination trusts.

To Recap:

· An inter vivos or living trust is created and used while the individual is living.

· A testamentary trust is created through the will and is used after the individual has died.

· A combination trust is created while the individual is alive, but it is not used until he or she has died.

Trusts are either revocable or irrevocable. A trust that is revocable gives the individual creating it (the testator) the ability to change or even terminate the trust. If the trust is irrevocable no changes may be made by the testator.

Revocable Living Trusts

Generally, individuals use revocable trusts because they want to manage their assets in some way for some specific purpose. Perhaps the individual is fearful that, at some point, they may be unable to manage their own assets. This might especially be true if early signs of Alzheimer’s disease have been diagnosed. The testator can name themselves as one of the trustees along with some other person or group of people. While the individual's health permits it, he or she can take an active role in managing the assets, but when their health deteriorates, the co-trustees can then take over. It is possible to write a revocable trust naming the individual (the testator) as a trustee with the power to actually handle the investments assigned to a bank, trust departments or to another person.

Revocable trusts have many uses when it comes to asset management. If a person owns real estate or businesses located in several different states, a trust can make not only management, but also estate disbursement much easier. On the management end, having a trustee who watches over the business in one state while the individual is in another can be a great advantage.

Revocable trusts do not save taxes! All too often revocable trusts are thought to prevent the IRS from taxing assets. This is simply not the case. The IRS has been around for a long time. Congress would simply not allow individuals to bypass taxation simply by using a revocable trust. Any time a person retains the right to receive income or decide how principal should be used, or even retain the right to vote stock in a family business, taxes must be paid. The Internal Revenue Service considers anyone who is able to change or terminate a trust to be the owner of the assets located in it. This is true even if someone else actually receives the income from the trust.

Avoiding Probate

A popular reason currently for creating a living trust is to avoid probate proceedings. Since a revocable living trust is a living entity, the death of the trust creator does not mean that the trust dies also. Because the trust lives on, it is able to disperse property without any court proceedings even after the death of the testator or trust creator. In many situations, this can be a major advantage for an individual. If the trust was created for the benefit of others, it can continue to benefit them long after the creator has died. The trustee(s) simply continue to administer the trust assets for them. If, on the other hand, the intent of the creator is to have the trust terminate at his or her death, that can happen also without court proceedings. The trustee will simply follow whatever directions were made in the trust.

It is true that transferring an estate through a trust is generally cheaper and faster than having an estate go through probate proceedings. Of course, the trust was also more expensive to set up and probably had expenses of administration as well. Even so, if a trust was set up, for example, to benefit the individual's children, the trustee can begin paying them income almost immediately upon the testator's death. However, if the individual's estate is part of a trust created by the will, the distribution may be delayed for months or even years until the estate is settled.

Earlier, we mentioned that a living trust might be used to benefit real estate or businesses located in multiple states. When the owner of these assets dies, probate could easily be required in multiple states if the assets were outside of a trust. By putting these assets into a trust, this can be avoided. However, few professionals recommend that a corporation be placed into a trust. Doing so creates multiple tax liabilities.

Avoiding probate may save commissions paid to an estate executor under a will, but the estate will not be without expenditures. The estate must still pay any expenses due for legal and accounting fees. Additionally, the assets in the trust are subject to federal estate and state death taxes. Assets transferred to a revocable trust are not considered gifts under the federal gift-tax exclusion. They do qualify, though, for the unified tax credit and the unlimited marital deduction.

Revocable Living Trust Disadvantages

Despite what some trust salespeople would have you believe, trusts can have disadvantages. To begin with, assets must be in a form suitable for trust management. This is probably the most frequent mistake made by many people. Some assets simply do not do any better in a trust, so the less expensive will make much more sense.

For example:

Darin and Darla Dobson are husband and wife. All their assets (their home, automobiles, bank accounts and so forth) are held jointly. Their pensions cannot be transferred to a revocable trust. In this situation, a revocable trust simply is not appropriate. It is expected that the coming years will experience multiple lawsuits regarding this point by state officials against those selling trusts.

If an individual decides that it does make sense to establish a revocable living trust, it will probably be necessary to transfer a number of bank accounts or securities and set up a system for record keeping. If a new asset is purchased, that investment will have to be registered in the name of the trust as well. In many states (though not all) the testator cannot be the sole trustee. In those states that require a co-trustee, the testator will have to tolerate another individual interfering in his or her financial affairs.

Depending upon the situation, creating a revocable living trust can be expensive. There should always be an attorney involved. If an individual does not work with the attorney, face-to-face, it is not a desirable situation. Attorney fees can run from only a few hundred to several thousand dollars, depending upon the individual's personal situation. There may be additional costs to transfer asset titles to the trust. There will probably be real estate recording fees, for example. Depending upon who is chosen, there may be fees for trustees. Some organizations provide trustees for a fee. This would include banks and trust organizations. A family member may not charge a fee, but he or she would certainly have the right to do so. If the trust must file income taxes, there will also be fees to accountants or tax preparers. The will should be coordinated with the trust to avoid tax problems.

Some of the advantages of the revocable living trust can be accomplished without actually creating a trust. For example, an individual can give another person a durable power of attorney.

Durable Power of Attorney

A power of attorney is a legal tool used to give another person the power to act in another's behalf. The person given this power is called an agent or an attorney-in-fact. That person does not, despite this name, have to be an actual attorney; it can be any person of legal age.

A power of attorney is initiated simply by signing a prepared form obtained from a bank, brokerage house, attorney or legal supply store. Often even stationary stores carry these forms. The powers that are given to the agent or attorney-in-fact are listed specifically. A power of attorney may be extensive or quite limited, depending upon the desires of the individual. A person may only allow the agent to sign on real estate contracts, or he or she may be allowed to sign virtually any legal form. Again, it simply depends upon the desires of the individual. Although forms can be purchased, if there are going to be specific requirements and limitations, it may be a good idea to have a specially written form drawn up by an attorney.

A simple power of attorney cannot be used after the death of the grantor. Additionally, they cannot be used if the grantor becomes disabled, unless the form specifically gives this authority. When a power of attorney gives the agent the power to act on an individual's behalf when they are incapacitated, that form is then called a durable power of attorney.

Powers of attorney are simple to establish and should be part of every will. They are especially suitable if the grantor has only a few assets, such as Certificates of Deposit at the local bank or just a mutual fund or two. Powers of attorney are often short-lived documents. A power of attorney can be terminated simply by tearing up the legal document that assigned the powers to the agent.

Any person giving another a power of attorney in their behalf does want to be aware of some possible disadvantages. The agent can act while the grantor is still alive and make decisions that he or she may not approve of. Even though the agent is required to make all decisions for the benefit of the grantor, there are few safeguards to prevent the misuse of funds. Should that happen, the only option may be a lawsuit and if there is nothing monetary to recover, that may not help any. Some organizations and large institutions will not accept standard-form power of attorneys. If this is the case, these organizations and institutions usually have a form on the premises that the grantor can use. A few may require that it be drawn up by an attorney.

Furthermore, it is very important that more than one person be aware of a power of attorney that is in existence. If the grantor has a trusted attorney, he or she may even want a copy filed at his or her office.

If a power of attorney does not suit the situation, an individual may also allow the court to appoint a guardian, conservator or committee to manage his or her affairs.

Guardians, Conservators & Committees

Sometimes guardians, conservators and committees are appointed by the court simply because the individual did not make any other arrangements. Sometimes it is done because the individual or a member of the family or some other interested party requested it.

When a guardian is needed a family member or some other person who is acting for the individual, files papers with the court requesting a hearing. The papers generally specify the relevant facts about the mental and physical conditions of the person being represented. The papers would also address the individual's financial assets and liabilities. An application of guardianship may also set out a plan for managing the money and caring for the individual. It is common for the doctor to be called to the court to testify about the person's mental and physical condition. This would help to provide evidence that the individual is unable to care for himself or herself and his or her finances. In some states, this amounts to a legal declaration of insanity, but that is not true in all states. In some states the individual has little or no say in the hearing, even though it concerns him or her and his or her finances. In some states, the person must give his or her permission for a guardian to be appointed. In every state, the individual has the right to be represented by an attorney. If the individual does not have an attorney, the court will appoint one. The attorney is called the guardian ad litem or a special guardian.

It is often assumed that only certain people or attorneys are qualified to be a court appointed guardian, but this is not the case. Anyone can be a guardian. We often see cases on television and in the newspapers of multiple parties applying for guardianship when lots of money or other assets are involved. If the person is of legal age, most states allow him or her to choose or at least recommend his or her own guardian. It is actually advisable to list desired guardians in one's will while they are mentally competent. Often the individual knows better than the courts do who would fairly represent them.

Where the individual has not recommended a desired guardian, most state laws leave the decision up to the judge. Normally he or she will appoint a close family member, such as the spouse, adult child, or other blood relative. They are most likely to appoint a person the individual has already been living with, such as the spouse. Some states require that the guardian reside in the same state as the individual being represented.

Appointing a guardian is not an easy task. It can be complicated and costly. Most professionals feel that this situation is not desirable and recommend the establishment of joint accounts, established power of attorney or a living trust instead. Still, it is an option.

When an individual believes that relatives may try to have a court declare them incompetent for financial reasons, attorneys often recommend that a revocable living trust be set up immediately naming the individual and a co-trustee of their choice. That allows them to retain their income for life without allowing the suspected relative or relatives the satisfaction of gaining control. Trusts, like wills, can be challenged in court, but a trust is very difficult to successfully challenge. Therefore, they seldom are.

Irrevocable Living Trusts

There is another type of trust that is created during one's lifetime. It is called an irrevocable living trust. Any agent selling trusts absolutely must understand the differences between a revocable and irrevocable living trust. An irrevocable living trust will shift the individual's assets for use by a beneficiary and remove the assets from the estate. When an individual cannot change the terms of the trust and retains virtually no power over the assets, the trust is irrevocable.

Revocable living trusts are used primarily for asset management. An irrevocable trust, on the other hand, has several other uses. An irrevocable trust can be used for asset management, but it is usually done for someone other than the trust creator, whereas a revocable trust usually manages the assets for the trust creator. Other uses include the removal of property from the taxable estate, which saves estate taxation, and also saves income tax while the creator is living.

At the beginning of the trust chapter, we said trusts had two main functions: asset management and tax minimization. The revocable trust is most often used for asset management and the irrevocable trust is used primarily for tax minimization. When a trust is used for tax minimization, it is always necessary to shift control of the asset or assets to someone else and the grantor and his or her spouse must give up the right to income from the trust. Many people do not want to do this for many reasons. We do not always know what the future will bring. To completely give away assets is not always something that a person feels comfortable with. For this reason, irrevocable trusts are often used for other reasons and not tax minimization, even though that is a possible use.

It is more common to see an irrevocable trust used to benefit specific people. A trust allows an individual to give to beneficiaries during one's lifetime, money that would otherwise have not been transferred until death. The trust can continue to shelter the money for the beneficiary protecting them from outside influences. For example:

Lucy has a grandchild she feels very close to. Even though she loves this grandchild, Lucy has seen evidence that her grandchild is not responsible with money. Lucy feels that the grandchild would quickly spend all the inheritance that she plans to give her. Therefore, Lucy sets up an irrevocable trust to manage the money and give it to her grandchild gradually in a responsible manner. It is Lucy's hope that over time her grandchild will learn to be more financially responsible, but in the meantime Lucy wants the money partially available. A trustee will follow Lucy's instructions and give the grandchild a monthly allotment. Neither the grandchild nor any creditors can touch the money in the trust.

A primary reason irrevocable trusts are used is for Medicaid protection. As of this writing, Medicaid cannot touch funds placed inside an irrevocable living trust, but Medicaid can tap funds placed in a revocable trust. A revocable trust can be tapped by creditors, but an irrevocable trust cannot be.

Despite the advantages of an irrevocable trust, there are certainly some disadvantages also. Creating an irrevocable trust is a serious step to take. Once it is set up, it is very hard or even impossible to undo. Sometimes only court proceedings can reverse an irrevocable trust. The court proceedings are time consuming and costly.

Sometimes an irrevocable trust can be terminated if all the beneficiaries give their consent to do so. However, if one of the beneficiaries happens to be a minor child, including unborn children, this may not be possible.

It is very important to consider all areas before enacting an irrevocable living trust. If the desire is simply to save or minimize taxes, the individual must be sure that he or she will not need the assets in the future. There is no way to know what will happen years down the road.

It is also very important to completely understand all the powers retained and given up. For example, if an individual creates a trust with the intention of primarily benefiting the children, but still maintains control of the income and disposition of the principal, he or she may be in for a nasty surprise. He or she will have relinquished control over the assets, but will still be responsible for paying the income taxes. A person who is a trustee of a trust they have created may also still have to pay income taxes. This is true even if that person is not receiving any of the income being generated. In addition, if the trust creator holds on to the purse strings of the assets in the trust, he or she may also be subject to estate taxes; something that the creator probably thought they were avoiding.

Another consideration must be looked at if the trust creator is married. If a husband and wife own property jointly, both of them must create the trust. Depending on how the trust is drawn up, this could mean that the assets in the trust wind up in the estate of the spouse who dies last where they would be subject to estate taxes. This is usually an unintended consequence of a joint trust.

Some real estate groups do not allow property to be held by a trust. This is often seen in cooperatives and condominium apartments. In addition, if property is mortgaged, before it can be transferred to a trust, it may be necessary to get the permission of the bank or mortgage company. If property is put into the trust successfully, refinance loans are often hard to obtain.

Types of Irrevocable Living Trusts

There are several types or intentions of irrevocable living trusts. They include:

1. Medicaid qualifying trusts

2. Trusts for children and grandchildren

3. Grantor-retained interest trust

Unfortunately, relatively few people seem willing to pay the cost of long-term care nursing home insurance. Either the average consumer is not willing to spend the extra premium dollars, or they are refusing to recognize the financial danger. Some people try to avoid having to "spend-down" to required Medicaid levels by simply hiding their assets in a living trust. A revocable living trust will not hide assets. Even attempting to use an irrevocable trust for this purpose is tricky. All rules and regulations must be conformed to and these can vary from one state to another.

To qualify as a Medicaid resistant trust, neither the creator nor the trustee can have any control over the assets in the trust or over the income they generate. If either the creator or the trustee does have control, then Medicaid counts both the income and assets in determining the individual's eligibility for benefits. Giving up all control preserves the savings and assets for the individual's heirs. Having done this, however, the individual cannot tap the funds, neither the principal nor the interest, for any personal reason.

Let's look at some examples:

Example #1

Marjorie has created a trust and named her child, Donald, as the trustee. Because Marjorie was concerned about the rising costs of living, she gave the entire principal up, but retained the right to all income from the trust's assets. If her income is greater than her state's income limit to qualify for Medicaid benefits, Marjorie will still have to spend that income for her nursing home care. The principal will remain safe, however.

In this case, if Marjorie has other income, she would have probably done just as well if she had spent the income generated from those assets for a sound nursing home policy. She would then still have had access to the principal for other enjoyment, such as traveling.

Example #2

Howard created a trust, but retained the right to all income AND also kept the ability to draw up to $5,000 each year from the principal in the trust. Howard thought this would enable him to retain some financial freedom while still qualifying for Medicaid benefits, should he need them. In fact, Howard will have to spend his income received from the trust on his nursing home care and also spend the $5,000 of the principal each year he is institutionalized. Even if Howard had not necessarily planned to withdraw the $5,000 each year, while he is in the nursing home he will be required to do so.

Again, Howard should have worried less about qualifying for Medicaid and more about finding a good nursing home policy.

Example #3

Gladys created a trust also. At one time, she had considered buying a nursing home policy, but her daughter, Janet, talked her into creating a trust instead. Janet felt that the premiums were too high on the nursing home policy she was considering. Since Janet had attended a sales meeting put on by a local attorney and insurance agent (who had combined forces to sell trusts) she felt a trust would be much more useful when it came to protecting her mother's assets.

Gladys retained the income generated from her assets, but she gave her trustee, Janet, the power to invade the principal for her benefit. Because Janet (it could have been ANY trustee) has the ability to withdraw principal for Gladys, Gladys will now have to spend down all of her assets, including those in the trust, before she can qualify for Medicaid. In this example, Gladys gained absolutely nothing by creating the trust. The trust may help her in other ways, but it will do nothing to help her achieve Medicaid qualification. For a third time, Gladys should have bought a long-term care nursing home policy.

In addition, to these examples, there are often other qualifications for Medicaid as well. Generally, when assets are transferred to a trust, they must be transferred within a specified time period prior to applying to Medicaid. The assets must also be transferred for their fair market value. Fair market values may not apply when transferring to a trust, but it would apply if the assets were being transferred to an individual, such as a child or other relative. Sometimes the required transfer time period does not apply. If an individual has been receiving care in a Medicaid-approved facility, such as an adult day care center, it may be possible, depending upon the state of residence, to transfer assets one day and begin receiving Medicaid the next. Since such circumstances are impossible to predict, it is better to be preparing in one way or another.

Irrevocable trusts are commonly set up for the benefit of children or grandchildren. Often these are intended to pay for college. There may be tax advantages to using irrevocable trusts for education; consult a tax expert for details. Since tax advantages do not necessarily benefit all individuals in the same way it is always a good idea to seek professional tax advice.

By shifting some assets, the couple may also avoid taxes on the income these assets generate. Again, however, the husband and wife must give up all control over these assets. That includes both the asset and any income it generates. The children, grandchildren or the trust itself will be responsible for any income taxes that come due. Often the children and grandchildren, or even the trust, are in a lower income tax bracket, so this is actually an additional advantage in many cases.

Note:

If the child or grandchild is under the age of 14, any income generated will be taxed at their parent's rate.

If the child or grandchild is over the age of 14 and the trust is used for such necessities as food and clothing, the IRS usually considers it to be the child's but still taxes it.

As we stated, many of these trusts are established for college funds. Often those creating these trusts do not realize that the Internal Revenue Service has ruled that income used to pay for a grandchild's college fees will be taxed to that child's parent, even if the grandparent paid the cost.

The third reason irrevocable trusts are often established is for grantor-retained interest Trusts. This type of trust is usually referred to by the acronym GRIT. This is an irrevocable trust created solely to save taxes. The grantor retains the right to receive an annuity or percentage payment from the trust for specific time period (generally no more than 10 years). If the individual lives for the entire ten-year period (or whatever period was stated), he or she has no further interest in the trust beyond that time period. At the end of the stated time period, the assets in the trust pass on to the named beneficiaries. If the individual dies during the stated time period, the assets go to his or her estate. If an early death occurs, there may not be savings on estate taxes.

Wealthy people use GRITs to save estate taxes, so their assumption is that they will live to collect the payments during the time period stated. People who are not wealthy do, however, also use GRITs. Tax savings come about because the individual (the grantor) is making a gift of the discounted future value of the property put into the trust. At the stated time period when the trust ends, the individual has removed assets from his or her estate (having put them into the irrevocable trust). Any increase in value was also in the trust, which benefited the estate. Many people put their home into a GRIT, but this should not be done without receiving expert tax advice in advance. Be sure the person giving the advice is well qualified because putting real property into a trust can be tricky and, of course, rules do change as well.

GRITs are most often used by those who have very large estates. If the estate is too small, the charges associated with establishing and maintaining the trust will eat up any tax savings.

Uniform Gifts to Minors

Sometimes it is not necessary to utilize a trust to accomplish a particular goal. Rather than using a trust document, a gift may be made by utilizing the Uniform Gifts to Minors Act. This works especially well if the grantor has little money to spare, but would still like to give something to a grandchild.

A Uniform Gifts to Minors account may be set up at a local bank or brokerage firm with any amount of money or securities. Depending upon the date of residence, the grantor may be able to transfer insurance policies, real estate or even limited partnership interests to a Uniform Gifts to Minors account. There is no limit as to how much can be contributed.

If desired, the grantor could give the money or assets to a "custodian" who would then be required to use it in the child's behalf for health, welfare and education. In fact, the grantor can be the custodian himself or herself. Most experts do not recommend that, however.

When the child attains legal age in their state of residence, the money remaining in the account automatically belongs to that child. Many people feel this is a disadvantage of Uniform Gifts to Minors accounts. A child who has just turned 18 (or 21 in some states) may not be able to handle large sums of money with wisdom. As a result, depending upon the child, a trust may be the better choice.

Testamentary Trusts

A testamentary trust created under an individual's will is always irrevocable, but it can be changed by changing the will while the creator or grantor is alive. After the death of the creator, however, no one can change the provisions. Testamentary trusts, since they are irrevocable, can save estate taxes and preserve assets.

There are different types of testamentary trusts. One type is a Credit Shelter or Bypass Trust. These trusts are designed to take advantage of the federal unified estate and gift-tax credit. They allow assets (to specified limits) left in trust by one spouse for the other to escape estate taxes in the survivor's estate.

Another type of testamentary trust is the Qualified Terminable Interest Property Trust (called a Q-TIP trust). The Q-TIP trust is commonly used and most likely to be recognized by name.

In the Q-TIP trust, all the income from it must be paid to a spouse and the executor of the estate is responsible for making sure that the trust is eligible for the marital deduction, thus exempting it from the gift or estate taxes. The assets in the Q-TIP trust are taxed in the spouse's estate.

As an example:

Mildred and Bob have been married since they were childhood sweethearts. Bob has always handled the finances and done very well financially. Bob is concerned that Mildred, while a very smart woman, does not have the experience to manage the finances. This may especially be true because her health is not good. Bob decides to create two trusts under his will: a Q-TIP and a bypass trust. Bob names Mildred and a trust management firm as co-trustees. Mildred will receive all the income from both trusts and the trust management firm can tap the principal, if necessary, for Mildred. The assets in both the trusts will escape federal estate taxes, due to the marital deduction. When Mildred dies the assets in the bypass trust will also escape taxation, but those in the Q-TIP trust will not. The assets in both the trusts, when Mildred dies, will go to their two sons.

Another type of testamentary trust is the Q-DOT or Qualifying Domestic Trust. This type of trust is not often necessary, but if an individual's spouse is not a United States citizen, it may be the best choice. The Q-DOT preserves the marital deduction for spouse's that are not citizens of the U.S. As you may know, the marital deduction is not available under normal circumstances to spouses who are not citizens. Without a Q-DOT the portion of the individual's estate that exceeds the unified credit would be subject to federal estate taxes.

The Q-DOT is similar to the Q-TIP in that the surviving spouse must receive all the income during his or her lifetime and the executor of the estate must choose to qualify the trust for the marital deduction. It is very important to seek qualified legal and tax advice before establishing a Q-DOT since rules do change.

Combination Trusts

As we mentioned, combination trusts combine qualities of both the living trust and the testamentary trust. Individuals set combination trusts up while they are still alive, but they do not become effective until after the creator's death.

Insurance trusts are often combination trusts. When setting up an insurance trust, there are three choices:

1. An individual can establish a revocable trust that does not actually own the insurance policy. The trust is named the beneficiary of the policy, so when the individual dies, the trust collects the proceeds. This type of trust is inactive, or non-funded, during the creator's lifetime. When death occurs, and funds are deposited into the trust, it then becomes a funded trust. This trust could also receive other assets and help eliminate some of the delay and expense of probate, if that was desired. A non-funded trust may also be called an empty trust.

2. An individual can establish a revocable insurance trust that does actually own the insurance policy. If this is the case, ownership of the policy must actually be transferred to the trust. The individual must give up any rights associated with ownership of the policy, such as the ability to change beneficiary designations. The trust can buy the policy, but the individual will have to pay the premiums.

3. An individual can establish an irrevocable living insurance trust. The primary purpose of such a trust would be to save estate taxes. The trust owns the policy, which means that the individual has given up all rights of ownership, such as the ability to change beneficiary designations. In addition, the individual must give up control over the trust and could not, for example, be a sole trustee. The insurance policy is removed from the taxable estate and also from the estate of the spouse and beneficiaries. It belongs solely to the trust. As always, an attorney should draw up this trust.

Any time assets are removed from an estate there could be gift-tax implications. Therefore, if an individual is considering an insurance trust it is probably best to have the trust buy a new policy rather than attempting to transfer an existing policy. If the individual seems set on using an existing policy, borrow the cash value before putting the policy into the trust. This will eliminate the potential for gift taxes. It should not be forgotten, however, that any outstanding policy loans would reduce the amount of death benefit. Other assets that were also put into the trust can pay the insurance premiums. If the grantor of the trust pays the premiums, they may be considered gifts to the trust and may, therefore, be subject to gift taxes. In larger estates, premiums may also be subject to generation-skipping taxes.

Whatever type of trust is utilized, it is vitally important that it be properly drawn up. Far too many trusts are improperly written by people who proclaim themselves to be "experts." Many law- and tax-professionals expect the future to bring multiple lawsuits from beneficiaries who feel the sting of improperly written trust documents.

There are many uses for insurance trusts. Perhaps one of the most widely stated reasons for an insurance trust has to do with second and third marriages. It is now common for an individual to have children from a previous marriage. While he or she may want to leave the estate to their spouse, they can still remember their children from former marriages by creating an insurance trust. The insurance proceeds will go to the children, while the estate assets will go to the current spouse.

Trust Record-Keeping

Revocable trusts are becoming very popular. Unfortunately, little information is given regarding record keeping when the trusts are sold. Whether the trust is revocable or irrevocable, good record keeping is necessary. In fact, many of the trust advantages would be lost if records were not kept properly. Commingling trust assets with non-trust assets could even render the trust ineffective. If the family attorney draws up the trust, this is probably not a danger. It is when trusts are established by trust companies that have no long-term connection to the trust creator that proper record keeping can be overlooked.

Trustees

In many states, the creator of the trust may act as the sole trustee and this is often done. In fact, the creator may be one of the trustees in either a revocable or irrevocable trust even if he or she retains no interest or control. Even if the individual's particular state does not allow them to be the sole trustee, he or she may still share the responsibilities with another party, such as a bank or other individual. If the trust creator cannot be the sole trustee, or does not desire to be, there are many good alternatives:

1. An adult child or close relative is a common choice. If this is done, do try to avoid conflicts of interest. A beneficiary should never be named as trustee. Anyone who would benefit from the estate should be avoided as trustee because their goals could certainly be different than those of the trust creator.

2. A professional person, such as an attorney, accountant or professional in the same field as the trust creator. It is not recommended that one of these professionals be the ONLY trustee, since professional fees could be unfairly charged.

3. A bank or trust company is often a good choice for a co-trustee. They tend to know the duties well and are prepared to perform them. It should be noted, however, that banks and trust companies do charge for this service. If a bank is chosen, be sure to check their investment history. Not all banks are experienced enough to handle a large trust, so this should also be considered.

Trusts definitely have a place in estate planning. However, a simple will is often adequate and will save the expense and administration of a trust. The most effective estate-planning specialist will understand which tool is most appropriate in individual circumstances. Any professional that believes the same tool is correct for each individual is not really an estate planner. Rather, he or she is a salesperson.

End of Chapter 18

2017