Lesson Four: Trusts for Family Security

Trusts and Your Estate Plan
When Colonel Harlan Sanders of fried chicken fame died, the contents of his will were published in various newspapers.  But the newspaper accounts must have been a disappointment to the curious.  Essentially, all the will said was that the bulk of the Colonel’s estate passed under a trust established during his lifetime.

The trust mentioned in Colonel Sanders’ will was undoubtedly a revocable living trust.  When linked to your will, the revocable trust can provide considerable privacy for your estate.  In addition to a unified estate plan, your trust also can provide:

Advantages of trusteeship.  Suppose you become incapacitated and are temporarily or permanently unable to manage your affairs.  If your assets are in a trust, the trustee can continue to handle your property on your behalf – without resorting to court-appointed guardians.  Many people, as they grow older, prefer to shift investment management decisions to a trustee.

Avoidance of probate.  Property you transfer to a revocable living trust during life is not subject to the delays, expenses and restrictions of probate.  People who own property in different states might face multiple probate procedures without a living trust.

A consolidated plan.  You can combine distribution of your retirement benefits, life insurance proceeds and assets that would pass under a will all under a unified plan:  your living trust.

Smooth transition.  Families of business owners may benefit from the assistance of a trustee in continuing or transferring a business at death.

Support for worthwhile causes.  You can use your revocable living trust to make gifts that benefit the organizations you support.  Gifts can be distributed according to the instructions you have left in the trust.  Such gifts are 100% deductible for federal estate tax purposes, and any lifetime gifts made from your trust can be deductible on your income tax return.  You even can leave funds to charity but have lifetime income paid to a family member with excellent tax results.  Any trust payments to charitable organizations during your lifetime can be deductible as a charitable contribution on your personal income tax return.

Are There Tax Advantages to Revocable Trusts?
The revocable trust is really not a tax avoidance tool.  During your lifetime, all trust income, including capital gains, will be taxed to you and any deductions will be passed through to you.  All the trust property will be included in your estate for federal estate tax purposes.

Are revocable trusts for everyone?  People who live in states where probate is short, simple and inexpensive may need only a simple will, or perhaps a will that contains a trust, to protect beneficiaries.  On the other hand, any individual with a complex estate or who owns property in different states might find a living trust attractive.  Note that there are costs associated with living trusts:  trustee fees, if you do not serve as trustee yourself, and legal fees when you establish a revocable living trust and change title of your property over to the trust.  In summary, the benefits of a revocable living trust should be weighed against the costs involved and the particular needs of your estate.

Some Basics About Trusts
What exactly is a trust?  Legend has it that trusts were developed during the Middle Ages to protect assets of Crusaders while they were off in the Holy Land.

Simply put, a trust is an alternative way to own and manage property.  Instead of holding property in your own name and managing it yourself, you turn the ownership and management responsibilities over to a professional manager – the trustee.  You give the trustee written rules to follow – how to invest, what to do with the income the trust property produces, who should get the principal from the trust and under what circumstances and when the trust will end.  This document is known as the trust instrument.  (As noted earlier, some individuals prefer to act as their own trustees.)

Other actors on the trust stage, besides the trustee, include you, the grantor, or creator, of the trust, and the beneficiaries of the trust.  Beneficiaries can be income beneficiaries, who receive trust income or principal, or remainder beneficiaries, who will receive the trust property when the trust ends.

A trust can be created during life (a living trust) or in a will (a testamentary trust).  It can be set up for any lawful purpose, including support for worthwhile organizations.  Here are some special purpose trusts that may be helpful in your estate planning:

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