FAQs about Estate Planning
What is a Revocable Living Trust?
This trust is established for reasons other than the reduction of estate taxes. With a revocable living trust, ownership of assets is transferred to the trust while you are alive. You can keep any or all of the income, act as trustee, change the trust’s provisions or terminate the trust. A successor trustee can be named to take over if you become mentally or physically disabled. Assets in the trust are controlled by the trust agreement and are not subject to probate proceedings, which is considered one of its major advantages.
What is a Bypass or Credit Shelter Trust?
Generally, this trust is used to help both spouses to take advantage of the estate tax exclusion amount, without directly transferring assets to other beneficiaries until both spouses have died. Assets equal to the estate tax exclusion amount are placed in trust after your death. Your spouse may then use the income, and in certain circumstances, some of the trust’s principal, with the remaining assets transferred to your other beneficiaries after your spouse’s death. Make sure to review the amount that will be placed in trust. With the exclusion amount currently at $2,000,000 and scheduled to increase to $3,500,000 in 2009, these amounts may exceed the amount you want in the credit shelter trust.
What is a Qualified Terminable Interest Property (QTIP) Trust?
This trust is typically used when the spouse wants to control the use of any remaining assets that are not placed in the bypass or credit shelter trust. Assets that are not placed in the credit shelter trust are placed in the QTIP trust. Income from the trust is distributed to the surviving spouse during his/her lifetime. Transfers to a QTIP trust qualify for the unlimited marital deduction, so estate taxes will not be paid after the first spouse’s death. After the surviving spouse’s death, the principal is includible in the surviving spouse’s estate for estate tax purposes, but the balance after payment of any estate tax is distributed to beneficiaries designated by the first spouse. This trust is often used to protect children from a previous marriage or to ensure that if a surviving spouse remarries, his/her new spouse does not inherit any of the assets.
What is an Irrevocable Life Insurance Trust?
This trust may keep the proceeds from a life insurance policy out of the insured’s estate for estate tax purposes. Often, the insurance policy is obtained to help pay estate taxes, with the policy held by the irrevocable trust. Annually, you can make gifts to the trust so the trustee can pay the policy premium. After your death, the trust receives the insurance proceeds, distributing them in accordance with the trust’s terms. With the uncertain future of estate taxes, you may wonder whether ILITs are still a valid estate planning strategy. You probably don’t want to undo any ILITs in place, since the estate tax won’t be fully repealed until 2010 and then will be reinstated in 2011. Even if the proceeds aren’t needed for estate tax purposes, you may find other uses for the proceeds, such as leaving larger bequests to beneficiaries or charitable organizations. Deciding whether to set up a new ILIT is a tougher decision. You should first analyze all relevant factors, including your views about the future of the estate tax.
What is a Charitable Remainder Trust?
Typically, this trust is used to provide a charitable contribution while postponing a large capital gains tax bill. You transfer an asset to the trust, typically one with a low basis that has appreciated significantly. Since the trust is tax-exempt, it can then sell the asset without paying any capital gains taxes and then reinvest 100% of the proceeds. You will receive an immediate charitable contribution deduction equal to the present value of the property the charity will receive when the trust is terminated. You will also receive distributions from the trust (which carry out current and accumulated income and capital gains), with any remaining trust principal passing to the charity after the trust terminates.
What is a Qualified Personal Residence Trust?
With this trust, you place your home or vacation home in an irrevocable trust, retaining the right to live in the home for a specified number of years. When the trust terminates, ownership passes to your beneficiaries. The gift tax value is determined on the date the house is placed in trust, by calculating the present value of the beneficiaries’ remainder interest in the home. If you die before the trust ends, the home is included in your estate at its fair market value. Since present value calculations are used to determine the gift’s value, this trust allows you to leverage the use of your $1,000,000 lifetime gift tax exclusion.
FAQs about Estate Administration/ProbateWhat is Probate?
Probate is the legal process by which property owned by someone who has died without a trust in place effects the legal title and transfer of assets to their heirs. In other words, probate is simply determining who gets what assets when someone passes away, either by looking at the will, or if no will exists, then the laws of intestacy–laws that determine the hierarchy of heirs. Probate law is a complex field and, practically speaking, requires an attorney’s guidance.
FAQs about Income Tax Planning and Tax Return Preparationadditional information coming soon