Does a trust make sense?
Source: http://money.cnn.com/magazines/moneymag/money101/lesson21/index6.htm
 
The notion of a legal trust may conjure up images of country clubbers cradling gin-and-tonics.

The truth is a trust may be a useful estate-planning tool for your family if you have a net worth of at least $100,000 and meet one of the following conditions, says Mike Janko, executive director of the National Association of Financial and Estate Planning (NAFEP):

• A sizeable amount of your assets is in real estate, a business, or an art collection;
• You want to leave your estate to your heirs in a way that is not directly and immediately payable to them upon your death. For example, you may want to stipulate that they receive their inheritance in three parts, or upon certain conditions being met, such as graduating from college;
• You want to support your surviving spouse, but also want to ensure that the principal or remainder of your estate goes to your chosen heirs (e.g., your children from a first marriage) after your spouse dies;
• You and your spouse want to maximize your estate-tax exemptions;
• You have a disabled relative whom you would like to provide for without disqualifying him or her from Medicaid or other government assistance.

Among the chief advantages of trusts, they let you:

• Put conditions on how and when your assets are distributed after you die;
• Reduce estate and gift taxes;
• Distribute assets to heirs efficiently without the cost, delay, and publicity of probate court. Probate can cost between 5 percent to 7 percent of your estate;
• Better protect your assets from creditors and lawsuits;
• Name a successor trustee, who not only manages your trust after you die, but is empowered to manage the trust assets if you become unable to do so.
• Trusts are flexible, varied and complex. Each type has advantages and disadvantages, which you should discuss thoroughly with your estate-planning attorney before setting one up.

When it comes to cost, a basic trust plan may run anywhere from $1,600 to $3,000, or possibly more depending on the complexity of the trust. Such a plan should include the trust set-up, a will, a living will, and a healthcare proxy. You will also pay fees to amend the trust if it’s revocable and to administer the trust after you die.

One caveat: Assets you want protected by the trust must be retitled in the name of the trust. Anything that is not so titled when you die will have to be probated and may not go to the heir you intended but to one the probate court chooses.

For a trust in which you want to put the majority of your assets - known as a revocable living trust - you also have to have a “pour-over will” to cover any of your holdings that might be outside of your trust if you die unexpectedly. A pour-over will essentially directs that any assets outside of the trust at the time of your death be put into it so they can go to the heirs you choose.

If you’d like to learn about different kinds of trusts, read on.

5 standard forms of trusts
Credit shelter trust: With a credit-shelter trust (also called a bypass or family trust), you write a will bequeathing an amount to the trust up to but not exceeding the estate-tax exemption. Then you pass the rest of your estate to your spouse tax-free. You also specify how you want the trust to be used - for example, you may stipulate that income from the trust after you die goes to your spouse and that when he or she dies, the principal will be distributed tax-free among your children.

Since your spouse is also entitled to an estate-tax exemption, the two of you can effectively double (or more than double) that portion of your kids’ inheritance that is shielded from estate taxes by using this strategy.

And there’s an added bonus: Once money is placed in a bypass trust it is forever free of estate tax, even if it grows. So if your surviving spouse invests it wisely, he or she may add to your children’s inheritance, says attorney Roger Levine of Levine, Furman & Smeltzer in East Brunswick, N.J.

Of course, you can pass an amount equal to the estate-tax exemption directly to your kids when you die, but the reason for a bypass trust is to protect your spouse financially in the event he or she has need for income from the trust or in the event you think your children will squander their inheritance before the surviving parent dies.

Generation-skipping trust: A generation-skipping trust (also called a dynasty trust) allows you to transfer a substantial amount of money tax-free to beneficiaries who are at least two generations your junior - typically your grandchildren.

The generation-skipping exemption is increasing gradually. The exclusion amount is $2 million for tax years 2006-2008. In 2009, it rises to $3.5 million. You may specify that your children may receive income from the trust and even use its principal for almost anything that would benefit your grandkids, including health care, housing, or tuition bills.

Beware, however. If you leave more than the exemption amount, the bequest will be subject to a generation-skipping transfer tax. This tax is separate from estate taxes, and is designed to stop wealthy seniors from funneling all their money to their grandchildren.

Qualified personal residence trust: A qualified personal residence trust (QPRT) can remove the value of your home or vacation dwelling from your estate and is particularly useful if your home is likely to appreciate in value.

A QPRT lets you give your home as a gift - most commonly to your children - while you keep control of it for a period that you stipulate, say 10 years. You may continue to live in the home and maintain full control of it during that time.

In valuing the gift, the IRS assumes your home is worth less than its present-day value since your kids won’t take possession of it for several years. (The longer the term of the trust, the less the value of the gift.)

Say you put a $675,000 home in a 10-year QPRT. The value of that gift in 10 years will be assumed to be less - say, $400,000 - based on IRS calculations that take into account current interest rates, your life expectancy, and other factors. Even if the house appreciates in 10 years, the gift will still be valued at $400,000.

Here’s the catch: If you don’t outlive the trust, the full market value of your house at the time of your death will be counted in your estate. In order for the trust to be valid, you must outlive it, and then either move out of your home or pay your children fair market rent to continue living there, Janko says. While that may not seem ideal, the upside is that the rent you pay will reduce your estate further, Levine notes.

Irrevocable life insurance trust: An irrevocable life insurance trust (ILIT) can remove your life insurance from your taxable estate, help pay estate costs, and provide your heirs with cash for a variety of purposes. To remove the policy from your estate, you surrender ownership rights, which means you may no longer borrow against it or change beneficiaries. In return, the proceeds from the policy may be used to pay any estate costs after you die and provide your beneficiaries with tax-free income.

That can be useful in cases where you leave heirs an illiquid asset such as a business. The business might take a while to sell, and in the meantime your heirs will have to pay operating expenses. If they don’t have cash on hand, they might have to have a fire sale just to meet the bills. But proceeds from an ILIT can help tide them over.

Qualified terminable interest property trust: If you’re part of a family where there have been divorces, remarriages, and stepchildren, you may want to direct your assets to particular relatives through a qualified terminable interest property (QTIP) trust.

Your surviving spouse will receive income from the trust, and the beneficiaries you specify (e.g., your children from a first marriage) will get the principal or remainder after your spouse dies. People typically use QTIP trusts to ensure that a fair portion of their wealth ultimately passes to their own children and not someone else’s.

Money in a QTIP trust, unlike that in a bypass trust, is treated as part of the surviving spouse’s estate and may be subject to estate tax. That’s why you should create a bypass trust first, which shelters assets up to the estate-tax exemption, and then if you have assets left over you can put it in a QTIP, Levine says.

Why do I need a will?
Source: http://money.cnn.com/magazines/moneymag/money101/lesson21/index3.htm
 
A will is a device that lets you tell the world who you want to get your assets. Die without one, and the state decides who gets what, without regard to your wishes or your heirs’ needs.

So-called intestacy laws vary considerably from state to state. In general, though, if you die and leave a spouse and kids, your assets will be split between your surviving mate and children. If you’re single with no children, then the state is likely to decide who among your blood relatives will inherit your estate.

Making a will is especially important for people with young children, because wills are the best way to transfer guardianship of minors.

You may amend your will at any time. In fact, it’s a good idea to review it periodically and especially when your marital status changes. At the same time, review your beneficiary designations for your 401(k), IRA, pension, and life insurance policy since those accounts will be transferred automatically to your named beneficiaries when you die.

A will is also useful if you have a trust. A trust is a legal mechanism that lets you put conditions on how your assets are distributed after you die and it often lets you minimize gift and estate taxes. But you still need a will since most trusts deal only with specific assets such as life insurance or a piece of property, but not the sum total of your holdings.

Even if you have what’s known as a revocable living trust in which you can put the bulk of your assets, you still need what’s known as a pour-over will. In addition to letting you name a guardian for your children, a pour-over will ensures that all the assets you intended to put into trust are put there even if you fail to retitle some of them before your death.

Any assets that are not retitled in the name of the trust are considered subject to probate. As a result, if you haven’t specified in a will who should get those assets, a court may decide to distribute them to heirs whom you may not have chosen.

Top things to know
Source: http://money.cnn.com/magazines/moneymag/money101/lesson21/

1. No matter your net worth, it’s important to have a basic estate plan in place.

Such a plan ensures that your family and financial goals are met after you die.

2. An estate plan has several elements.

They include: a will; assignment of power of attorney; and a living will or healthcare proxy (medical power of attorney). For some people, a trust may also make sense. When putting together a plan, you must be mindful of both federal and state laws governing estates.

3. Taking inventory of your assets is a good place to start.

Your assets include your investments, retirement savings, insurance policies, and real estate or business interests. Ask yourself three questions: Whom do you want to inherit your assets? Whom do you want handling your financial affairs if you’re ever incapacitated? Whom do you want making medical decisions for you if you become unable to make them for yourself?

4. Everybody needs a will.

A will tells the world exactly where you want your assets distributed when you die. It’s also the best place to name guardians for your children. Dying without a will - also known as dying “intestate” - can be costly to your heirs and leaves you no say over who gets your assets. Even if you have a trust, you still need a will to take care of any holdings outside of that trust when you die.

5. Trusts aren’t just for the wealthy.

Trusts are legal mechanisms that let you put conditions on how and when your assets will be distributed upon your death. They also allow you to reduce your estate and gift taxes and to distribute assets to your heirs without the cost, delay, and publicity of probate court, which administers wills. Some also offer greater protection of your assets from creditors and lawsuits.

6. Discussing your estate plans with your heirs may prevent disputes or confusion.

Inheritance can be a loaded issue. By being clear about your intentions, you help dispel potential conflicts after you’re gone.

7. The federal estate tax exemption - the amount you may leave to heirs free of federal tax - has been rising gradually and will hit $3.5 million in 2009.

Meanwhile, the top estate tax rate is coming down. The estate tax is scheduled to phase out completely by 2010, but only for a year. Unless Congress passes new laws between now and then, the tax will be reinstated in 2011 and you will only be allowed to leave your heirs $1 million tax-free at that time.

8. You may leave an unlimited amount of money to your spouse tax-free, but this isn’t always the best tactic.

By leaving all your assets to your spouse, you don’t use your estate tax exemption and instead increase your surviving spouse’s taxable estate. That means your children are likely to pay more in estate taxes if your spouse leaves them the money when he or she dies. Plus, it defers the tough decisions about the distribution of your assets until your spouse’s death.

9. There are two easy ways to give gifts tax-free and reduce your estate.

You may give up to $12,000 a year to an individual (or $24,000 if you’re married and giving the gift with your spouse). You may also pay an unlimited amount of medical and education bills for someone if you pay the expenses directly to the institutions where they were incurred.

10. There are ways to give charitable gifts that keep on giving.

If you donate to a charitable gift fund or community foundation, your investment grows tax-free and you can select the charities to which contributions are given both before and after you die.