MoneyWatch

Athena financial & insurance services, inc.

Registered Investment Advisors
Text Box: Most of the time when doing estate planning for my clients, the type of trust I frequently end up recommending is a Living Trust with special marital provisions to minimize estate taxes and protect the distribution of assets to the heirs. But there are also several specialized trusts available which can used to solve unique estate planning needs. An Irrevocable Life Insurance Trust is a device which allows you to avoid taxes on the proceeds of your life insurance polices. But there is a catch: as its name implies, an irrevocable life insurance trust cannot be revoked. That means the grantor gives up the right to income from the trust, and cannot change it in any way (including beneficiaries). But in return, the grantor can receive tremendous income and estate tax savings, and pass his assets to his heirs without the taxes that come with them. After the trust is established you can either place an existing life insurance policy in it or provide funding for the trustee to buy a new policy by making gifts to the trust. The trust owns the insurance and is the beneficiary—and the proceeds are both income tax-and estate tax free. One caveat, if you transfer an existing policy to the trust you need to live three years after the transfer in order to avoid estate taxation. Grantor Retained Interest Trusts. These are a type of irrevocable trusts for assets that are quickly appreciating in value. Essentially, this type of trust allows you the right to transfer assets (typically to a grandchild) yet receive income from them or continue to use them. The value of your gift will be reduced by the income you receive when it is passed down. With the Grantor Retained Annuity Trust, you put your assets in a trust and name a beneficiary. You can specify a fixed percentage of the assets to come to you annually and pick a mandatory pay-out time; but after that date, the assets become the property of the beneficiary, but at a reduced value. With a Qualified Personal Residence Trust, a grantor with a large residential value donates his or her residence to an irrevocable trust but retains the right to live in the residence for a certain number of years After those years have passed, the residence becomes the property of the remainder beneficiaries which are usually family members. With this type of trust, the grantor's residence can remain in the family while providing a significant estate tax savings, especially if the property is rapidly appreciating. Even though there may be current gift tax consequences with such a trust the overall benefits should be greater than the current taxes. If the grantor dies before the term of the trust expires however, the value of the residence will go back into the grantor’s estate. If all parties understand the transaction, there usually isn't a problem finding a suitable place for the grantor to live after the trust ends; the recipients typically agree rent it back to the grantor. A Qualified Terminable Interest Trust (also called a Q-TIP trust) takes advantage of the unlimited marital deduction. Community assets belonging to the deceased spouse are placed in the trust for the benefit of tbe surviving spouse. The spouse receives a lifetime income from the trust, but all its assets are passed to beneficiaries chosen by both spouses before the first spouse’s death. This means the surviving spouse cannot change who the property passes to after his or her death. Furthermore, no distributions are permitted to anyone but the surviving spouse during his/her lifetime. All trust assets are included in the survivor's gross taxable estate. A QTIP trust delays federal estate tax on the property placed in the QTIP trust until the second death. For more information about specialized trusts contact your legal advisor.▲

Estate planning tools...

Volume 17, Issue 16

August 14, 2006

Trusts With a Twist