Trusts are an excellent way to pass and preserve wealth privately. Two of the main benefits of using a trust to pass your assets – timeliness and cost – were explored in our previous post. Unlike the probate process that accompanies the settlement of an estate by will, a trust provides your heirs with immediate access to the trust benefits. The settlement of an estate passed by will can also gobble over 4% of an estate’s value, regardless of size. A third reason people use trusts to pass wealth is that they also enable the settlor, or donor, to minimize estate taxes, making more of your wealth available to your beneficiaries.
The death of a spouse is devastating. Whether the death was sudden or after a long illness, one day you are married and the other day you are not. The deceased spouse wants to be able to provide for the living spouse, especially if the living spouse is battling a chronic health condition. Paying for your spouse’s living expenses and medical care and expenses, including long-term medical care is of paramount importance to the deceased spouse. Married couples can benefit from the establishment of a revocable trust.
For a married couple, a revocable trust may be used as part of the larger plan to take full advantage of both spouses’ federal and/or state estate tax exclusions. Upon the death of a spouse, the assets in a revocable trust can be used to fund a family trust – also referred to as a “credit shelter,” “bypass,” or “A/B” trust – up to the amount of that spouse’s federal or state estate tax exclusion. By bypassing estate tax upon the death of one spouse, the assets held in the family trust can then grow free from further estate taxation at the death of the surviving spouse.
The balance of the assets in the revocable trust can then be transferred to the surviving spouse free of estate tax pursuant to the spousal exemption. At the death of the surviving spouse, of course, these assets may be included in the surviving spouse’s estate for estate tax purposes. However, the surviving spouse will be able to use the marital assets as if the other were still alive, significantly reducing the financial impact of the deceased spouse’s financial contribution to the married couple’s living expenses, until he or she passes.
Gain control over distribution of your assets by using trusts
As long as a trust is created for lawful purposes, by setting up a trust the donor is able to determine how his or her assets are to be passed on to the beneficiaries when a triggering event, like the death or the donor or the beneficiary reaching a certain age, occurs. Distribution of the trust income can be made for specific purposes. A common example is to make trust income available to children or grandchildren for educational purposes. Another example is to distribute trust income at periodic intervals, such as 20% when the beneficiary reaches 25; 40% when the beneficiary reaches 50, and so forth.
The beneficiary can include a charitable organization, such as a religious institution, an art organization, or a social organization, like the March of Dimes. Should the charity cease operations, the trust document can specify that any remaining assets be transferred back to the donor’s estate for distribution to heirs.
With a trust, you can ensure that your retirement assets are distributed as you’ve planned and made more of the assets available to use by minimizing the estate taxes. An estate planning lawyer can help you determine which type of trust is best for your situation.