How Can a Living Trust Help Me Control My Estate?
Can I Benefit from an A-B Trust?
How Can I Benefit from a Charitable Lead Trust?
How Can I Benefit from a Charitable Remainder Trust?

How Can a Living Trust Help Me Control My Estate?

Living trusts enable you to control the distribution of your estate, and certain trusts may enable you to reduce or avoid many of the taxes and fees that will be imposed upon your death.

A trust is a legal arrangement under which one person, the trustee, controls property given by another person, the trustor, for the benefit of a third person, the beneficiary. When you establish a revocable living trust, you are allowed to be the trustor, the trustee, and the beneficiary of that trust.

When you set up a living trust, you transfer ownership of all the assets you’d like to place in the trust from yourself to the trust. Legally, you no longer own any of the assets in your trust. Your trust now owns your assets. But, as the trustee, you maintain complete control. You can buy or sell as you see fit. You can even give assets away.

Upon your death, assuming that you have transferred all your assets to the revocable trust, there isn’t anything to probate because the assets are held in the trust. Therefore, properly established living trusts completely avoid probate. If you use a living trust, your estate will be available to your heirs upon your death, without any of the delays or expensive court proceedings that accompany the probate process.

There are some trust strategies that serve very specific estate needs. One of the most widely used is a living trust with an A-B provision. An A-B trust enables you to pass on up to double the exemption amount to your heirs free of estate taxes.

When an A-B trust is implemented, two subsequent trusts are created upon the death of the first spouse. The assets will be allocated between the survivor’s trust, or "A" trust, and the decedent’s trust, or "B" trust.

This will create two taxable entities, each of which will be entitled to use a personal exemption.

The surviving spouse retains full control of his or her trust. He or she can also receive income from the deceased spouse’s trust and can even withdraw principal from it when necessary for health, support, or maintenance.

On the death of the second spouse, the assets of both trusts pass directly to the heirs, completely avoiding probate. If each of these trusts contains less than the exemption amount, these assets will pass to the heirs free of federal estate taxes.

The information provided here is to assist you in planning for your future. Proper tax and legal advice should always be obtained.

Can I Benefit from an A-B Trust?

Avoiding Estate Taxes

In general, all estates are subject to estate tax. However, there are certain ways to avoid paying estate taxes.

One way is to use the unlimited marital deduction. The government exempts transfers between a husband and wife from estate and gift taxes. This means that in most cases, whatever you leave to your spouse will not be taxed.

In addition to the unlimited marital deduction, the federal government gives everyone a "unified credit." The credit exempts the first $2 million (in 2006 through 2008) of your estate from federal estate taxes. You can use your unified credit during your lifetime to reduce or eliminate gift taxes; otherwise, it will be applied to reduce estate taxes.

Unfortunately, those who have an estate valued over the applicable exemption amount and who rely completely on the unlimited marital deduction may not benefit from their unified credit as much. Using the marital deduction at the first death merely postpones estate taxes to the death of the surviving spouse. Then, when the surviving spouse passes away, the estate tax burden may be unnecessarily large.

There are strategies you can use that may save you a substantial amount in estate taxes. One of the most widely used strategies is known as the A-B trust. This strategy can enable you and your spouse to pass on up to $4 million (in 2006 through 2008) in assets — free of federal estate taxes.

The A-B Trust

By using an A-B trust, you will ensure that both spouses take advantage of the unified credit — once at the death of the first spouse, and then again at the death of the second spouse.

An A-B trust can be set up by establishing a living trust with an A-B provision. Upon the death of the first spouse, two separate trusts are created. The assets of the surviving spouse are transferred to the A trust, and an amount up to the exemption amount of the deceased spouse’s assets is transferred to the B trust. This then creates two taxable trusts, each of which is entitled to use the exemption.

The B trust is subject to estate taxes. However, because of the unified credit, no taxes will be owed. The surviving spouse maintains control over the assets of the A trust and receives income from the B trust. Then, at the death of the second spouse, only the A trust is subject to estate taxes because the B trust was taxed at the first death. After the death of the surviving spouse, the B trust can continue for the benefit of the grantors’ family, often the children. The trust assets can be divided into separate equal trusts for the benefit of the grantors’ children who will receive net income, and then at some specified age they will receive the principal.

There are many considerations involved with A-B trusts, and you’ll need the help of competent legal counsel. However, the A-B trust can be an effective way to reduce estate taxes and preserve family assets.

How Can I Benefit from a Charitable Lead Trust?

Charitable lead trusts are designed for people who would like to benefit a charity now rather than later. You may have heard about some charitable trust strategies before but decided against them because you wanted to make an immediate gift to charity.

With a charitable lead trust, your gift can have an immediate impact, and you’ll be entitled to other benefits as well. These trusts will enable you to take advantage of tax benefits and still make a significant gift.

If you are accustomed to making outright contributions to your favorite charity, or if you typically sell an investment and give all or a portion of the money to charity, you may be attracted to the special advantages of using a charitable trust.

Avoiding capital gains taxes on an appreciated asset is a very appealing benefit for investors. It is also a way for charitable organizations to receive a much larger donation because they are not required to pay tax on capital gains. Once the trust is established and the assets are transferred, the trustee can then sell the assets and reinvest the funds.

You also get an immediate charitable income tax deduction based on the "life expectancy" of your gift. With a charitable lead trust, you are giving the charity the income from the asset and not the asset itself. Your deduction will be based on the rate of return the charity can expect to receive, the duration of the trust, and the IRS tables used in the calculation. Your write-off will be limited to a portion of adjusted gross income but can be carried forward to future years.

With a charitable lead trust, the income from the reinvested assets will then go to the charity. The charity will receive distributions for the duration of the trust. You may specify a set number of years or the life of you or someone else. At the end of this period, the asset would revert back to you or your family, for example.

A charitable lead trust may also help reduce family squabbles over inheritance. If you were to actually gift the asset to the charity upon your death, your heirs may feel somewhat cheated. By giving income to the charity during your lifetime and having the asset revert back to your family upon your death, you may avoid much of this potential controversy.

If you are interested in increasing your gift to a charity and your tax benefits during your lifetime, a charitable lead trust may enable you to accomplish your goals.

By taking the time to plan your charitable gifts, you may be able to take advantage of some special tax benefits and make charitable giving a real win-win situation.

Keep in mind, however, that you should seek professional advice from an attorney before establishing such a complex trust.

How Can I Benefit from a Charitable Remainder Trust?

Sometimes it takes tough economic times and natural disasters to unite and bring out the best in people. Natural disasters such as hurricanes and earthquakes have served to bring communities together and impact the nation as a whole. Americans have given generously to rebuild communities and help local residents through these difficult situations.

Many people have also responded to tragedies worldwide or have made donations to wildlife and environmental charities. And when we give, most of us simply give from the heart and do not always consider the financial implications.

In many instances, there are ways to increase your gifts. The charity can receive a more substantial gift and you can increase your tax benefits. The charitable remainder trust is a popular estate-planning strategy that could enable you to gift an appreciated property or security and retain an interest income for you and your family.

Once your gift is put in a charitable trust, you will receive a current income tax deduction. Neither party will owe taxes on this transfer or upon the appreciation of the asset. The trust will usually sell the asset and reinvest the proceeds in an income-producing investment. You can receive this income in exchange for gifting the ownership of the asset to the charity.

You will then need to decide how you would like to receive income. You can receive either a percentage of the value of the trust or a fixed amount. With a percentage allocation, your income will vary based on the current value of the trust. Some even offer a "make-up" clause. If the trust is not able to provide the designated income for one year, the shortfall will be added to the following year’s distribution.

Trusts that provide a fixed amount each year will not be able to take advantage of future growth or higher earnings of the asset, but they do offer consistent income even in a stagnating market.

Choosing a trustee and clearly stating your intentions in the trust document and to the trustee are of vital importance. Once the trust is in place, it is an irrevocable instrument. Even if the charity does not receive any benefit for several decades, it will eventually assume ownership. In the meantime, the trustee is in charge of controlling the assets in the trust. Choose someone who knows how to handle financial matters and who will carry out your intentions.

A charitable remainder trust may allow you to make a substantial gift to charity, avoid capital gains tax, and provide regular income for you and your family.

The use of trusts involves a complex web of tax rules and regulations. You might consider enlisting the counsel of an experienced estate-planning professional before implementing such sophisticated strategies.

© 2007 Emerald Publications