Trusts for Estate Planning

A common reason many people save and invest throughout their lifetimes is to leave a financial legacy or resource to family members, friends or charitable organizations. Although providing monetary support to heirs is an important goal for many people, few take the essential steps to plan for the transfer of their assets upon their death.

Preparing for transfer of your wealth in a manner that meets your intentions and preserves the value of your legacy is called estate planning. Estate planning is not only for the very wealthy.

If you own assets such as personal property (furniture, jewelry, clothes, automobiles), investments (cash, savings, securities), real estate, employee benefits (group insurance, retirement or profit sharing plans) and other items such as the proceeds of a lawsuit, then you have an estate. Without proper planning, over half of the value of that estate could be lost due to federal estate taxes at your death.

Do you want the IRS to be your single largest beneficiary? If not, there are many tools you can use to create an estate plan for your own financial situation and assure that your hard-earned assets go to those you choose.

One of the most common tools found in many estate plans is a trust.

What is a trust and why is it important?

A trust is similar to a will in that it is used to distribute your assets to heirs upon your death. But a trust can be more versatile than a will and provide greater benefits to your beneficiaries.

For example, trusts are often used to provide a specific amount of regular income to one or more people, such as children, spouses or disabled individuals, throughout their lifetimes. Funding a trust is often a better way to create a financial resource for an individual, rather than giving them the money outright. For example, you may wish to add a spendthrift clause to the trust document to help prevent the trust's beneficiaries from mismanaging the assets or spending it too quickly.

Funding a trust also allows an individual to pass along assets to beneficiaries tax-free by taking advantage of the federal unified tax credit and without having to endure the probate process that comes with bequeathing assets through a will. Also with a trust, you can have a professional investment manager manage the assets in the trust on behalf of the trust's beneficiaries.

Creating a Trust

Trusts can be created in three different ways:

• A testamentary trust is a trust that is created within your will and takes effect upon your death. The trust is funded by the assets in your estate and administered by a trustee named in the will. A testamentary trust is used primarily to reduce estate taxes and to appoint an individual to manage the assets on behalf of a beneficiary.
  
  
• A living trust is created and funded while you are alive. You, or someone you name, may act as the trustee for the living trust, but you should also name someone else as a successor to assume the role of the trustee after you die. A living trust is used primarily to establish professional investment management of the assets in the trust and to avoid the probate process.
  
  
• A pour-over trust is created when assets from a will transfer into an established life insurance trust. Through this mechanism, assets that have been probated are transferred into a living trust.

Whenever a trust is used, it is essential to also have a pour-over will to prevent the creation of an intestate estate. A pour-over will is created to catch any property which had been (intentionally or inadvertently) left out of the trust, not held in joint tenancy or subject to other contractual arrangements at the time of your death. Sometimes, for convenience, people intentionally omit putting certain assets into a trust, such as a car or real estate.

Revocable vs. Irrevocable Trusts

When you establish a trust, you must decide if the trust will be revocable or irrevocable. This is an important decision that can impact future considerations for the trust.

A revocable trust can be changed at any time. You can change beneficiaries, trustees or the manner in which your assets are distributed. An irrevocable trust is set in stone. No changes are allowed at any time, although you can continue to add assets to it.

One important difference between revocable and irrevocable trusts is the manner in which estate taxes are treated. A revocable trust can allow you to transfer assets and property without incurring gift taxes, but the assets and property remain a part of your estate and will be figured into the estate tax calculation. With an irrevocable trust, assets that you transfer into the trust become the property of the trust and are removed from your estate.

If you intend to give assets to a favorite charity or other organization, a trust offers a convenient way of doing so. Giving to a charitable trust allows you to deduct the amount of your gift from your federal income taxes for the year in which you establish the trust, in addition to reducing your estate and your estate taxes as well.

Some of the more common charitable trusts include:

• A charitable lead trust provides income generated by the trust's investments to the charity for a specified number of years. Once the trust ends, your heirs receive the remaining value of the trust's assets at a reduced gift tax cost.
  
  
• A charitable remainder trust provides income to you or your beneficiaries for a specific period of time. But unlike the charitable lead trust, the charity receives the value of the assets remaining in the trust at its end.
  
  
• A charitable gift annuity is an outright gift to a charity, but provides you with a tax deduction and current income stream for you and your spouse throughout your lifetimes. The amount of the tax deduction and the income stream depend on your life expectancy and the life expectancy of your spouse.

Lincoln Investment Planning, Inc. Can Help

Lincoln Investment financial representatives are here to help you every step of the way and can assist you and your other professional advisors, such as your attorney and accountant, in carefully structuring a trust. Regardless of what you own, it is important that you be able to pass it on to the people or organizations you wish, in the manner that you wish. The key to making this happen is through proper estate planning. Take the time and opportunity now to consider a trust to protect your assets — and your beneficiaries.