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Estate planning: Is a trust beneficial?

These tools aren't just for Rockefellers. Use the tips below to determine whether or not setting up a trust the best for you.


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 sizable 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% to 7% 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 setup, a will, a living will and a health-care 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.

You may specify that your children may receive income from the trust and even use its principal for almost anything that would benefit your grand kids, 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.

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