2010 January Keep Punching Newsletter

Protect Your Assets With A Trust

Contrary to what many people think, trusts are not reserved for the wealthy. The truth is, people from all walks of life may benefit from a trust. You can, too.

What Is a Trust?
Generally speaking, a trust is a legal entity that is central to a three-part agreement in which the owner of an asset – the trust’s “grantor” – transfers the legal title of that asset to a trust for the purpose of benefiting one or more beneficiaries. One or more trustees then manage the trust. Trusts may be revocable or irrevocable and may be included in a will to take effect at death.
Revocable trusts can be changed or revoked at any time. For this reason, the IRS considers any trust assets to still be included in the grantor’s taxable estate. This also means that the grantor must pay income taxes on revenue generated by the trust and possibly estate taxes on those assets remaining after his or her death.
Irrevocable trusts cannot be changed once they are executed. The assets placed into an irrevocable trust are permanently removed from a grantor’s estate and transferred to the trust. Income and capital gains taxes on assets in the trust are paid by the trust. Upon a grantor’s death, the assets in the trust are not considered part of the estate and are therefore not subject to estate taxes.
The trust’s grantor names a trustee to handle investments and manage trust assets. The grantor can work with the trustee on major decisions, or the trustee can be assigned full authority to act on the grantor’s behalf.
A trustee may be an entity that offers experience in such areas as estate tax law and money management or it may be an individual such as an attorney or accountant. Trustees have a responsibility – known as a “fiduciary responsibility” – to act in the grantor’s best interest.
Understanding the Role of a Trust
Although trusts can be used in many ways, they are most commonly
used to:
  • Control assets and provide security for both the grantor and the beneficiaries
  • Provide for beneficiaries who are minors or require assistance managing money
  • Avoid estate or income taxes
  • Provide expert management of estates
  • Avoid probate expenses
  • Maintain privacy
  • Protect real estate holdings or a business
Different kinds of trusts are designed to meet different needs and objectives. For example, if your primary goal is to ensure privacy in the settlement of your estate or to centralize control of assets, you might choose a living trust. A living trust allows you to remain both the trustee and the beneficiary of the trust while you’re alive. You maintain control of the assets and receive all income and benefits. Upon your death, a designated successor trustee manages and/or distributes the remaining assets according to the terms set in the trust, avoiding the probate process.
As another example, an irrevocable life insurance trust (ILIT) is often used as an estate tax funding mechanism. Under this trust, you make gifts to an irrevocable trust, which in turn uses those gifts to purchase a life insurance policy for you. Upon your death, the policy’s death benefit proceeds are payable to the trust, which in turn provides tax-free cash to help beneficiaries meet estate tax obligations.
If you want to leave money to your grandchildren, you might consider a generation-skipping trust. This trust can help preserveyour $3,500,000 generation skipping transfer tax exemption (for 2009) on bequests to your grandchildren and avoid the tax on bequests exceeding that amount, which can be up to 48%.
These are just a few examples of the many types of trusts. Although not quite as popular as wills, trusts are becoming more widely used among Americans, wealthy or not. Increasing numbers of people are discovering the potential benefits of a trust – how they can help protect assets, reduce tax obligations, and define the management of assets according to their wishes in a private, effective way.
Should you have any questions as to whether a trust would be beneficial to you, please call me.
LPL Financial does not provide legal advice. Please consult your legal advisor.
Special Points of Interest:
For 2010, salary deferrals in 401(k), 403(b), and 547(e) plans remain the same at $16,500 ($22,500 for those age 50 and older) and SIMPLE plans remain the same at $11,500 ($14,000 for those 50 and older).
The Younger Set:
Congratulations to our clients, Lyn and Digby Wirtz of Ridgewood on the birth of their granddaughter, Olivia Mackintosh Kramer, on August 2, 2009. Olivia weighed 7 lbs. And measured 19 3/4 inches long.

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