What a Beneficiary Controlled Trust Can Do to Protect Your Legacy After You Are Gone

Many estate planners believe that their job is done when the beneficiaries avoid probate and receive their inheritance. However, when beneficiaries receive their inheritance in their name outright, that needlessly exposes the legacy you leave to the claims of creditors, lawsuits, divorce, the loss of governmental benefits they might otherwise receive and even a second estate tax when they die. “Outright” distributions from the trust to the beneficiary in his or her name should rarely occur for large or even relatively modest estates.

A better approach is for each beneficiary’s inheritance to go into his or her own Beneficiary Controlled Trust. If properly drafted and funded, the beneficiary can control, use and enjoy the inheritance with fewer risks than outright ownership. A Beneficiary Controlled Trust will help protect your loved ones from the bad things in life that may occur without any fault of your loved ones. For example, divorce, lawsuits, creditor claims, bankruptcy or even estate tax upon their death. Sadly, bad things happen to good people. On the other hand, a spendthrift trust is traditionally intended to be used for beneficiaries who are not trusted to make good financial decisions. A spendthrift trust is similar to a spigot on a hose. The trustee in his or her discretion can open the spigot to permit spending or close the spigot to restrict or prevent spending by the beneficiary.

Asset Protection with Plenty of Control

A Beneficiary Controlled Trust refers to a trust where the beneficiary may also be the controlling trustee. The beneficiary can be provided virtually the same control as he or she would have with outright ownership. For example, the beneficiary, as the controlling trustee, could make all investment decisions. Investments such as a home or brokerage account would be held in the name of the trust and would be better protected from lawsuits, divorce, creditors or predators.

After they inherit, the primary beneficiary could alter the level of control or protection if greater risks arose. They could appoint a  co­-trustee to control distributions or even investments. If the risk is very high, the primary beneficiary could even resign as trustee and appoint their best friend, trusted family member or professional to act as Trustee. We represented a beneficiary who was going through a contested divorce at the time she was inheriting funds from her mother. She designated her son to be the Trustee to further separate her inheritance from the divorce proceedings. We had a similar situation where a client was being sued regarding a car accident that resulted in a death. In that case, the client designated his best friend to act as the Trustee.

An HEMS Trust: Estate Tax Protection Comes with Vulnerability

If the primary beneficiary wants to act as the sole trustee with control over investments and administration, distributions can be limited to the beneficiary’s health, education, maintenance and support (“HEMS”) to avoid estate tax (the “HEMS Trust”). This structure is designated by the Grantor (or trust creator) in the trust instrument or document created. However, some states permit certain creditors, such as a divorcing spouse or health care providers, to pierce through the trust and access assets up to the HEMS standard.

If they obtain a judgment against the beneficiary, the price to be paid for the beneficiary’s additional control is potentially weaker creditor protection. A better approach, from a creditor protection standpoint, may be to empower the trustee to make discretionary distributions not tied to any specific standard.

Going with an Independent Trustee Instead

If the primary beneficiary of a Beneficiary Controlled  seeks even greater asset protection, then they can appoint an independent trustee who acts as the distribution trustee. The independent trustee is authorized to make distributions to the beneficiary in such amounts and at such times as may be determined in the sole discretion of that Independent Distribution Trustee (the “Discretionary Trust”). The Discretionary Trust generally provides greater asset protection irrespective of the beneficiary’s state of residence.

Considering what happened to Brittney Spears, the beneficiary may be concerned about giving such discretion to the Independent Distribution Trustee. This issue can be minimized by providing the primary beneficiary with the right to remove and replace the Independent Distribution Trustee. While the beneficiary does not have direct control over distributions, the beneficiary can select who does hold the power, so long as the person selected is not a related party or subordinate person.

2 Ways to Deal with the Tax Consequences of Trusts

Careful consideration must also be given to the trust income tax rules. The highest marginal federal income tax rate for ordinary investment income is now 37%. In 2021 the highest federal income tax rates are triggered with income for a single individual of $523,601 or more. For married taxpayers, the highest federal income tax rates are triggered with income of $628,301  or more. The highest marginal tax rate for a trust is also 37% in 2021 — but it is triggered with income of only $13,050. The difference in tax liability can be substantial.

To help deal with that tax issue, the Beneficiary Controlled Trust can be drafted in some cases to be a “Grantor Trust.” A Grantor Trust is a trust that is “disregarded” for income tax purposes. Income is taxed to the beneficiary without regard to whether the income is distributed to the beneficiary. A Grantor Trust will avoid application of the higher tax rates for a trust.

Alternatively, the Beneficiary Controlled Trust can be drafted as a “Complex Trust” for income tax purposes. The Complex Trust files a separate tax return. Income actually distributed to the beneficiary is taxed at the beneficiary’s lower individual tax rates. Only income not distributed by the Trust will be taxed at the higher trust income tax rates.

There is no single best approach, and careful analysis of the client’s goals, concerns and situation should always be analyzed. The Trust may, in some circumstances, have an ability to toggle, or switch, between a Grantor Trust and a Complex Trust.

As a general rule, a client with a substantial estate should always consider the protective features of a Beneficiary Controlled Trust. If you have any questions about this topic. Please contact the Goralka Law Firm.

Founder, The Goralka Law Firm

Founder of The Goralka Law Firm, John M. Goralka assists business owners, real estate owners and successful families to achieve their enlightened dreams by better protecting their assets, minimizing income and estate tax and resolving messes and transitions to preserve, protect and enhance their legacy. John is one of few California attorneys certified as a Specialist by the State Bar of California Board of Legal Specialization in both Taxation and Estate Planning, Trust and Probate.

Source: kiplinger.com

It’s Never Too Late for a Family Meeting – Here’s How to Do Them Well

Jane and John, who are parents to four adult children, have amassed substantial wealth during their careers. To experience the joy of seeing their children enjoy some of this wealth – and to take advantage of the current high federal estate tax exemption amounts – which could potentially be reduced – they would like to give away some of it during their lifetime.  However, they are concerned that their children and spouses might not be ready to handle the responsibilities of receiving large monetary gifts that could change their lives. 

Though well-intentioned, will the gifts become burdensome to their children? How can Jane and John ensure that their children and their families will be good receivers and stewards of their inheritance? While Jane and John may be hypothetical clients, their challenge is a common one.

Wealth education, or even the basics of money, is not part of the curriculum in most public schools.  If parents don’t take on that responsibility, young adults often leave home with little to no knowledge about the fundamentals of money management, such as banking, debt, saving and investing. There are many reasons these conversations aren’t had at home, especially for families of substantial wealth. Some parents feel that sharing information about their wealth would demotivate children and make them “trust fund babies,” while to others it is a reminder of their own mortality. Perhaps parents never had the conversation with their own parents growing up, so they find it a difficult and awkward subject to broach. Avoiding the subject seems like the easier and more pleasant path to take.

Regardless of how much wealth a family has, wealth education is crucial to overall financial education, preparing for the future, and to becoming a good steward of an inheritance. For parents who haven’t had conversations early, it’s not too late.

Family meetings are a thoughtful and effective way of bringing members of a family together with a goal of facilitating communication and education. They allow for sharing family stories, communicating values, setting goals to help ensure transparency, and helping members across generations understand their roles around stewardship and wealth.

How do you have an effective family meeting, one that its members not only value, but also look forward to?

  • Do some prep work. As an important first step, the hosts of the meeting should spend time with each participating family member to help them understand the reason for the meeting and learn more about what their expectations are. There should be a desire and commitment from the participants to invest time and effort to make family meetings successful.
  • Plan ahead. Setting a clear agenda that defines the purpose and goals of each meeting and sharing this agenda with participants before the meeting are a key to its success. Choose a neutral location that makes everyone comfortable and encourages participation.  Carving out part of a day during a family trip or while at a family vacation home are examples of neutral locations where families tend to be at ease.
  • Break the ice. Allow time for a fun ice-breaker activity to put people at ease. This could be an activity or a question (“What does the family business mean to you?” “What money messages did you receive, and what message would you like to pass on to your own children?”) that all family members answer.
  • Set aside time for learning. Include an educational component in the agenda, such as an introduction to investing, estate planning, budgeting and saving, or philanthropy.
  • Have a “parking lot.” Document subjects brought up that might need to be addressed in a future meeting. This shows members that everyone’s participation and input is valuable and that while a subject might not fit into the present agenda, it will be included in a future meeting.
  • Include a facilitator. Consider including a trusted adviser to facilitate the meeting. Having a facilitator present who is experienced in working with families of wealth can help with managing the agenda, offering a different perspective, calming emotions and making sure everyone is heard and understood.
  • Follow up. Include some “homework” and schedule the next meeting to set expectations about continuing to bring the family together. 

Correctly facilitated, family meetings can be a safe place for members across generations to communicate effectively and learn about stewardship. The goal is that the family unit will continue to flourish even after the first generation has handed over the reins to the next.

So, what happened to Jane and John? They sought the help of their adviser, who spent time upfront understanding their goals and getting to know their children and their spouses. They planned their first family meeting. During that meeting, the parents shared their story and communicated details about their values, goals and expectations.  Over the next few years, the family met several times and talked about a variety of topics. The children learned more about investing and opened their own investment accounts, to which the parents made gifts. They talked about estate planning and created their own estate plans. 

Following a meeting on philanthropy, the parents created a Donor Advised Fund so that the children could come together, recommend gifts to the charities of their choice and make joint decisions about charitable giving. These planned meetings brought the family together, nurtured relationships and strengthened the family unit. They came to understand their responsibilities as stewards of the wealth created by their parents and gained more confidence to build lasting wealth for the generations to come.   

Senior Family Wealth Adviser, The Colony Group

As a Senior Wealth Adviser at The Colony Group, Indrika Arnold provides clients with financial planning services while helping the firm develop and refine Family Office services. She is a financial professional with 15 years of experience. Indrika serves ultra-high net worth individuals and families, and she focuses on all areas of planning. She has a particular interest in helping to prepare the next generation to be responsible stewards of their inherited wealth.

Source: kiplinger.com

4 Reasons Families Fail When Transferring Wealth

Over the next 25 years, analysts anticipate $68 trillion to be passed down to younger generations and charities. While the importance of legacy planning is not limited to the forthcoming Great Wealth Transfer, it does spotlight the significant amount of wealth that has been created, primarily by Baby Boomers, and the need to transition these assets thoughtfully. A legacy plan, regardless of the size of a portfolio, is an essential component of the financial planning process, ensuring the assets an individual has spent their entire life accumulating will transfer to the people and organizations they want, and that family members are well-prepared to inherit and execute their wishes.

There are, however, four common missteps that can cause individuals and families to veer off track.

1 of 4

Failure to create a plan

A woman lounges on a couch lazily.A woman lounges on a couch lazily.

It’s difficult for individuals to think about their own passing, so this tends to push planning off “to another day.” Of course, if an individual passes before a plan is in place, their goals and wishes cannot be executed.

I guide clients to establish a legacy plan as early as possible. While every individual is different and there is no steadfast rule regarding when precisely to create a plan, sooner is almost always better. When an individual begins to envision or has a preference about where and how their assets are transferred – say it is passing down specific heirlooms, charities receiving a portion of wealth, or a family business transitioning to younger generations – it should trigger the need to put a plan in place.

Understand that a legacy plan can evolve over time; you don’t just set it and forget it. A plan should be rooted in what an individual or family envisions today, but with the flexibility to accommodate for changes in the future.

2 of 4

Lack of communication and trust

A man makes the universal symbol for "My lips are sealed."A man makes the universal symbol for "My lips are sealed."

A common, and hazardous, reason that legacy plans often don’t succeed is a lack of communication and trust. Not communicating a plan early on can create a rift between generations, especially if it is different than adult children might expect or incorporates other people and organizations that come as a surprise to heirs.

I’ve seen individuals have great success by bringing their adult children – who are in their 20s and 30s – into the conversation to establish the communication early on. If sharing monetary figures is uncomfortable, focus on the overall, high-level strategy instead, reviewing timing, familial values and what the plan seeks to accomplish. Open communication can mitigate negative feelings, such as distrust or confusion among family members, allowing for a more successful transfer.

3 of 4

Inadequate preparation

A yellow road warning sign reads "Oops!"A yellow road warning sign reads "Oops!"

Another reason families don’t succeed in transferring wealth is inadequate preparation among intended heirs. The ability to get individual family members on board with defined roles can be challenging, but it can alleviate a lot of potential headaches and obstacles down the road.

I frequently work with clients to coordinate a Family Alignment Day, where we review the vision and values of the plan and make sure everyone is on the same page. From there, we think through what everyone’s contribution to the plan can be – for example, if one family member is highly organized, perhaps they take control of coordinating family meetings to oversee the plan and ensure it remains on course to meet objectives on an annual basis.

4 of 4

Overlooked essentials

Looking through a magnifying glass at a $100 dollar bill hiding in grassLooking through a magnifying glass at a $100 dollar bill hiding in grass

While a broad bucket, the final reason plans don’t succeed is because of mistakes, such as overlooking tax implications or legal issues.

Enlist the help of professionals and create an “A-team”— composed of specialists, such as a financial adviser, tax professional and estate planning attorney — who can work in tandem to ensure the plan will meet its intended goals. For example, from a tax standpoint, professionals should flag upcoming legislative changes, as they could justify altering the plan. One instance of this: Many provisions in the Tax Cut and Jobs Act of 2017 will sunset after 2025, specifically impacting income tax rates and brackets, and estate and gift tax exemptions. 

Whether creating a legacy plan today, or as part of the millions of households in the Great Wealth Transfer that will establish plans soon if they haven’t already, preparation and flexibility are keys to wealth transfer success. Set up an accommodative plan early on, have open communication with family members, and review philosophies and values to make sure everyone is on the same page. This will leave loved ones with the ability to understand, respect and meaningfully execute the legacy plan’s objectives.

Senior Financial Adviser, Vanguard

Julie Virta, CFP®, CFA, CTFA is a senior financial adviser with Vanguard Personal Advisor Services. She specializes in creating customized investment and financial planning solutions for her clients and is particularly well-versed on comprehensive wealth management and legacy planning for multi-generational families. A Boston College graduate, Virta has over 25 years of industry experience and is a member of the CFA Society of Philadelphia and Boston College Alumni Association.

Source: kiplinger.com

What Is a Business Trust and How Does It Work?

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When it comes to trusts, most people are familiar with individual trusts, trust funds or family trusts that are connected to an individual or family. But another type of trust exists for entrepreneurs and companies called business trusts, which are also known as common law trusts. A business trust is a legal instrument that can be used to delegate the authority to manage a beneficiary stake in a certain business. It can also be used to run the business itself. However, there are multiple types of business trusts, with each working slightly differently. If you’re thinking of using a business trust, it might be a good idea to consult with a financial advisor.

What Is a Business Trust?

Functionally, a business trust is quite similar to an individual or family trust. It helps delegate control of assets to a trustee, who manages the trust and its contents on behalf of the grantor. An individual trust typically contains assets such as money or property, but a business trust holds the rights to an individual’s stake or interest in a business. As a result, a business trust can be the legal entity that technically owns a business.

Business trusts can have one or multiple beneficiaries. A business can be owned by multiple trusts and entities or just a single one. They are primarily used to safeguard against taxes and liability, as trusts tend to have different legal protections than individuals. However, the specifics of these rules can vary by state.

How Does a Business Trust Work?

A business trust is a legal agreement. In turn, the process of creating one typically begins with a conversation between the involved parties and a trust lawyer who can help define the terms of the agreement. Following this, the trust is legally created through what is called a declaration of trust.

The declaration of trust details the terms of the trust and delegates instructions and responsibilities for the trustee. These may include the valid length of the trust and the duties, powers and interests of the beneficiaries. Once the terms are settled, the one who owns the trust signs the declaration, officially creating it in the process.

The trustee of a business trust has a fiduciary duty to act in the best interests of the beneficiaries of the trust. This is the same kind of fiduciary duty that applies to other financial situations. Most notably, SEC-registered financial advisors have a fiduciary duty to act in the best interests of their clients.

The trustee is the one who holds the rights and control of the business stake in the trust. It’s typically one individual serving as a trustee of a business trust. At the end of the trust’s length, the business interests transfer to its beneficiaries. Business trusts are treated as corporations and may conduct business transactions just like individuals.

Types of Business Trusts

Just as there are several different types of individual trusts, there are three main categories of business trusts. Here’s a breakdown of each:

Grantor Trust

The first type is called a grantor trust. Grantor trusts consist of a grantor, a trustee and a beneficiary. This type of trust is very self-contained. The grantor pays taxes on the income that comes from the trust and has complete control over it. This includes control over business distributions to the beneficiaries.

Simple Trust

Next is a simple trust. For a trust to fall into this category, its status must be verified by the IRS. With a simple trust, the trustee must distribute business profits directly to the beneficiaries. It’s also prohibited from doing things like touching any principal assets.

Complex Trust

A complex trust is in some ways the opposite of a simple trust, though it still isn’t managed by the beneficiaries of the trust. Business profits and other funds may be distributed only in part to beneficiaries and may even be contributed to other organizations, such as charities. In order to maintain status as a complex trust, the trust needs to have at least some form of income.

Pros and Cons of Business Trusts

There are several benefits and downsides to opening and using a business trust. The most prominent perk has to do with liability. Similar to an LLC or corporation, business trusts are created so that the beneficiaries of the trust can reap the benefits of owning and often running the business, while being protected from individual liability. Business trusts are also beneficial because they provide an added layer of privacy and it’s easy to set distribution terms for beneficiaries.

On the flip side, business trusts can be expensive and difficult to maintain. You’ll want to work with a lawyer to open a trust, but you’ll probably want to retain their services throughout the life of the trust to ensure it continues to operate the way you want it to. This process isn’t always easy, as business trusts can face a variety of obstacles when it comes to legal compliance. Additionally, business trusts typically can’t have lifetimes of longer than 99 years, so multi-generational arrangements may not be an option.

How to Set Up a Business Trust

If you’re interested in setting up a business trust, the first step is to talk to an attorney that can help. As we state above, you’ll likely need to work with an attorney throughout the life of your business trust. Note that trust lawyers typically charge around $500 per hour and the outright cost to set up a business trust could be more than $5,000.

Once the trust is up and operating, the hardest part is officially out of the way. While you may need to amend the trust down the road, you’ll have to detail some of the most important terms, such as the distribution schedules, trustees and beneficiaries.

Bottom Line

A business trust is often difficult to set up, and it’s not a necessary part of every business out there. Your business arrangement may be good as it is, or you may be better suited to use a limited liability corporation (LLC), a partnership or another type of structure. Before you pull the trigger on creating a business trust, it’s important to figure out the key elements surrounding it.

Tips for Business Planning

  • Deciding how to structure your business isn’t always an easy task. It can help to have a financial advisor in your corner, guiding you through some of the toughest decisions. SmartAsset’s free tool matches you with financial advisors in your area in 5 minutes. If you’re ready to be matched with local advisors, get started now.
  • When deciding on a business plan, it’s important to cover all the necessary details, from future income projections to leadership hierarchies. Check out SmartAsset’s guide to writing a financial plan for a business.

Photo credit: ©iStock.com/ljubaphoto, ©iStock.com/Yagi-Studio, ©iStock.com/seb-ra

Sam Lipscomb, CEPF® Sam Lipscomb is a writer for SmartAsset. His work spans a wide variety of personal finance topics with expertise including retirement, investing and savings. He is particularly well versed in credit cards. Sam has been featured in The Economist and on The Points Guy. He is a Certified Educator in Personal Finance (CEPF®). Sam graduated from Kenyon College with a degree in Economics and enjoys being a go-to resource for family and friends when it comes to personal finance. Originally from Washington, DC, Sam loves all things aviation and is a Cleveland sports fan. He currently lives in New York.

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Estate vs. Trust: What’s the Difference?

Estate vs. Trust: What’s the Difference? – SmartAsset Close thin Facebook Twitter Google plus Linked in Reddit Email

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Trusts and estates are the two main legal structures for transferring assets to your heirs and beneficiaries. Each works in critically different ways. Estates make a one-time transfer of your assets after death. Trusts, meanwhile, allow you to create an ongoing transfer of assets both before and after death. Here’s how each one works. Consider working with a financial advisor as you weigh the relative merits of trusts and estates.

What Is an Estate?

An estate is everything that you own when you die. This does not include anything held jointly with someone else. Nor does it include anything that you have transferred or otherwise assigned by the time you die. Your heirs include anyone who receives money, belongings or other assets from the estate.

So, for example, say Steve dies. The house that Steve and his wife owned together doesn’t become part of his estate, as it now belongs solely to his wife. Nor would anything that Steve gave away as his death was approaching. Instead, Steve’s estate would include anything that Steve independently owned at the time of his death.

An estate is temporary. It exists to make a one-time distribution of the assets of the deceased. Once those assets have been disposed of, the estate no longer exists. This does not mean, however, that an estate is necessarily short-lived. Some estates can last for years, if that’s how long it takes to make a final distribution of all assets.

An estate can be distributed in two main ways: by will or by legal chain of inheritance.

A will is a series of instructions for who should get the assets of an estate and how those assets should be distributed. If the decedent (a legal term for person who died) has a valid will at the time of death, the estate is distributed under those terms.

When someone dies without a will, this is known as dying intestate. In this case their assets will be distributed according to state law. Most of the time this means that the decedent’s assets go directly to their next of kin. In most states, spouses claim priority in this line of inheritance, followed by children, then parents and then extended family.

One of the most common misunderstandings regarding an estate is how much control someone has over the terms of his or her will. While state law governs who inherits when someone dies intestate, most states have very few restrictions on how someone can distribute assets through a will. When you die, you are mostly free to leave your belongings to whoever you choose.

Before anyone can inherit, however, an estate has to resolve three main obligations:

When someone dies, creditors and bill collectors have first claim on the assets of the estate. The estate pays all debts owed by the dead person before anyone else can inherit. This can involve selling off property, if the deceased didn’t have enough cash to pay bills. If those bills are larger than the estate itself, the heirs receive nothing.

In addition, when someone is wealthy enough, the person’s estate can trigger dedicated estate taxes.

Estate taxes are assessed based on how much an heir has received, and they require a high level of wealth. In general, for an individual, estate taxes do not apply unless you have inherited more than $11.18 million ($22.36 million for a couple filing jointly). This includes not only cash but also the value of any property or other assets. (For example, if you inherit land worth $30 million you will owe estate taxes on that inheritance.)

If estate taxes apply, they are paid out of the estate itself.

Finally, some estates require oversight and management. Any related costs and fees are drawn directly from the estate itself.

An estate can trigger any number of different potential costs. For example if the terms of a will are overseen by a lawyer, that attorney will bill his or her legal fees directly to the estate. If an estate requires management, someone may be named its executor. This is someone whose job it is to distribute assets according to the will’s instructions, pay any bills, and otherwise manage the distribution of assets. Depending on the workload, the executor may bill the estate for his or her time. Or, if an estate is large or complex enough, a probate court judge may oversee the distribution of assets. Court costs and fees are drawn from the estate.

In other words, any costs related to the management of the estate are paid by the estate itself.

What Is a Trust?

A trust is a legal entity which holds and distributes assets according to certain conditions. The person who creates the trust, who is known as the “grantor,” can establish those conditions largely at will. A trust exists independently of the people who created it and receive funds from it. Any assets belong to the trust itself until they are distributed. To create a trust, you have three basic steps.

  • First, as the grantor you create a pool of assets.
  • Second, you hand those assets over to a third party to manage and oversee. This third party is known as the “trustee(s).”
  • Third, you identify the people who can receive the trust’s assets based on certain terms and conditions. These people are known as the “beneficiaries.”

For example, say that Steve is a wealthy man and wants to ensure an education for the next generation of his family. He might set up a trust along the following lines:

  • As the grantor, Steve would place $5 million in an account.
  • The account would be overseen by Steve’s lawyer, who would act as the trustee.
  • Any child, niece and nephew of Steve’s are named as the beneficiaries. They can draw on the account to pay tuition for any college or university.

Under this trust Steve’s family members can now draw upon the money to pay college tuition, but nothing else. He hasn’t simply given them a pot of money. The gift has conditions. Steve’s lawyer, as the trustee, has the job of making sure the beneficiaries meet those conditions. For example, it will be her job to make sure that Steve’s family members have applied to actual colleges and aren’t just scamming the trust.

Steve’s lawyer, as the trustee, is also responsible for financially managing the trust. She will oversee its investments, banking and other administrative matters.

Like an estate, a trust draws its costs from itself. The trustee, in our example Steve’s lawyer, will bill the costs of her time to the trust itself. If she needs to hire any accountants, investigators or any other related services, she would bill those costs to the trust itself as well.

Unlike an estate, you can set up a trust even while you’re still alive. If Steve had written that $5 million grant into his will, none of his family members would get the tuition money until after his death. By creating a trust he ensures that they can receive the money even while he is still alive. This is called a living trust.

However, like an estate, a trust survives its creator’s death. When someone does this the trust does not become part of their estate. Instead the trust is a legal entity on its own. When the grantor dies, the trust continues on until it either runs out of assets or its terms dictate otherwise. (For example, a trust might say “after 50 years dissolve the trust and distribute any remaining assets among living beneficiaries.”)

Living trusts are common ways for families to pass down land, heirlooms and other significant assets. It allows property to belong to the family in general, even if it is held and used by any one individual at a time. Living trusts also mean that assets can avoid probate court and even estate taxes depending on how the trust has been established.

Most trusts are what is known as a revocable trust. This means that the grantor can still control, change and even rescind the trust at will. Ultimately the person still owns the assets, the trust just manages those assets for him or her.

An irrevocable trust is the opposite. Under this setup the grantor cannot control, change or rescind the terms of the trust. Once it is created the trust belongs to its beneficiaries, even though they must still meet its terms or conditions.

While trusts and estates both exist to distribute assets, they do so in very different manners. A trust can be created while the grantor is alive, while an estate is created at the moment of someone’s death. A trust is intended to be a semi-permanent entity. It exists to distribute assets over time according to a series of rules and conditions, overseen by a trustee. An estate is intended to be temporary. It exists to make a one-time distribution of assets, after which it will no longer exist.

An estate exists whether you plan for one or not. However, you can structure your estate by writing a will, which dictates who gets your assets and how. A trust has to be specifically created. Once a trust has been created it, too, dictates who gets your assets and how.

The Bottom Line

Trusts and estates are the two most common mechanisms for passing down assets. An estate is everything that you own at the moment of your death, and is passed in a one-time distribution to your legal heirs. An estate is a legal entity that can exist for generations, and distributes assets according to a series of rules and instructions.

Estate Planning Tips

  • A free, easy-to-use retirement calculator can give you a good estimate of how you are doing in reaching your financial goals.
  • To build a trust you need a well-managed set of assets to begin with. Building a portfolio of such assets is best done in partnership with a financial advisor. Finding one doesn’t have to be hard. SmartAsset’s matching tool can connect you in minutes with a financial planner, the kind who can help you build a portfolio worth passing on to your heirs. If you’re ready, get started now.

Photo credit: ©iStock.com/kWaiGon, ©iStock.com/Andrii Dodonov, ©iStock.com/FatCamera

Eric Reed Eric Reed is a freelance journalist who specializes in economics, policy and global issues, with substantial coverage of finance and personal finance. He has contributed to outlets including The Street, CNBC, Glassdoor and Consumer Reports. Eric’s work focuses on the human impact of abstract issues, emphasizing analytical journalism that helps readers more fully understand their world and their money. He has reported from more than a dozen countries, with datelines that include Sao Paolo, Brazil; Phnom Penh, Cambodia; and Athens, Greece. A former attorney, before becoming a journalist Eric worked in securities litigation and white collar criminal defense with a pro bono specialty in human trafficking issues. He graduated from the University of Michigan Law School and can be found any given Saturday in the fall cheering on his Wolverines.

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Trustee vs. Executor: What’s the Difference?

Trustee vs. Executor: What’s the Difference? – SmartAsset Close thin Facebook Twitter Google plus Linked in Reddit Email

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Estate planning can be difficult. In addition to the fact that it may bring up some uncomfortable feelings – like grappling with one’s mortality – there is also the fact that it can be a complex legal process. There are ways to make estate planning easier, though, such as trusts. If you form a trust, there are a few terms you’ll need to know: trustee and executor. These terms are sometimes used interchangeably, but they actually have distinct roles. A trustee manages a trust and the assets inside, while an executor is responsible for fulfilling the deceased’s wishes and distributing property and assets as proscribed. For help with trusts or other estate planning items, consider working with a financial advisor.

What Is a Trustee?

A trustee is the person who manages the assets in a trust. This is different from the trustor, who’s the person who creates the trust. When it comes to estate planning, the trustee normally plays their most important role after the trustor passes away.

Trustees are especially important when the assets in the trust are being held for a minor who’s set to receive the assets inside the trust once they reach a specific age. For instance, let’s say someone forms a trust full of investments they want passed on to their children, who are teenagers. If that person dies before their children turn 18, the named trustee will manage the assets in the trust for those minor children.

The trustee has a legal responsibility to act in the best interest of the eventual beneficiaries of the assets in the trust. This means making the smartest investments, not taking unnecessary risks and doing anything else that will lead to the best results for them.

What Is an Executor?

An executor, on the other hand, is the person who makes sure that a recently deceased person’s wishes – as expressed in a will – are carried out. They make sure that the correct assets are passed on to the right family and friends. This can include following through on any charitable donations the decedent wanted to be made with the money they left behind and defending the will against any challenges.

The executor also has legal responsibilities, such as making sure that the estate’s probate paperwork is filed. They also must oversee the probate process in the name of the estate. This could also include making sure the estate tax is dealt with correctly.

While some states have their own estate and inheritance taxes, the premier one is the federal estate tax. For 2021, this only applies to estates worth more than $11.7 million, meaning most estates won’t end up owing anything. Executors will need to know the state laws for the place where the deceased died as well. States have different exemption amounts too.

Finally, the executor has to settle any debts the estate has. This includes credit cards, mortgages and any other loans the person still owed when they died.

Choosing Trustees and Executors

There are many estate planning choices, but picking trustees and an executor are among the most important. For both, you’ll want to pick someone you explicitly trust. A trustee should be someone who’s willing to manage the trust for as long as necessary. In addition, you should trust their ability to make decisions in the best interest of the beneficiaries.

For an executor, the right choice is someone who you know will make sure your wishes are respected. While you’ll likely be leaving a will with detailed instructions, it may even make sense to talk with your executor before you die so they are clear on your wishes. This can help ensure your needs are carried out exactly how you envision them.

Bottom Line

A trustee is the person who manages a trust on behalf of a beneficiary. They are legally obligated to always manage the assets in the best interest of said beneficiary. An executor, on the other hand, is responsible for carrying out the wishes of a recently deceased person. This includes distributing assets and fulfilling any debts incurred while the person was alive.

Both executors and trustees are equally important to the entities that they represent. They are each also central parts to many people’s estate plans, which is one of the last marks you’ll leave on your family. In turn, make sure your selection process for them is as complete as possible.

Estate Planning Tips

  • A financial advisor can help you make all the right choices when it comes to estate planning, and finding one doesn’t have to be hard. SmartAsset’s free tool connects you with financial advisors in your area in five minutes. If you’re ready to be matched with local advisors, get started now.
  • Another person you’ll need to name is a guardian. This is who will take custody of any minor children you have if you and your spouse die. Though this isn’t pleasant to think about, if you take care of it now it can save everyone a big headache later.

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Ben Geier, CEPF® Ben Geier is an experienced financial writer currently serving as a retirement and investing expert at SmartAsset. His work has appeared on Fortune, Mic.com and CNNMoney. Ben is a graduate of Northwestern University and a part-time student at the City University of New York Graduate Center. He is a member of the Society for Advancing Business Editing and Writing and a Certified Educator in Personal Finance (CEPF®). When he isn’t helping people understand their finances, Ben likes watching hockey, listening to music and experimenting in the kitchen. Originally from Alexandria, VA, he now lives in Brooklyn with his wife.

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How Does a Credit Shelter Trust Work?

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A credit shelter trust is used to help married couples with significant assets pass their estates after their deaths to children or other beneficiaries without incurring estate taxes. Credit shelter trusts are also useful for avoiding probate, shielding assets from creditors and ensuring the wishes of a deceased spouse are carried out. While they are mostly useful for large estates, couples with sizable financial assets can get important benefits from using credit shelter trusts as part of overall estate plans. Consider working with a financial advisor as you create or update your estate plan.

Estate Tax Background

The primary purpose of a credit shelter trust is to reduce federal estate taxes levied on assets transferred to heirs. Death or wealth transfer taxes, as they’re also known, have been around in various forms since the early days of America. They’ve existed in their current form since 1916.

Estate taxes can be significant. The top rate, which is levied on amounts more than $1 million over the exemption amount, is 40%. The exemption amount is indexed to inflation and for 2021, it’s $11.7 million for individuals or $23.4 million for couples. Since few estates are that large, not many Americans actually pay any federal estate tax, sometimes derisively referred to as the death tax. However, for married couples who have enough assets, credit shelter trusts can be real money savers.

The estate tax exemption is currently slated to expire in 2025. While it may be renewed by Congress, it’s likely that it will be different. Estate tax law changes frequently at both the federal and state level, so it’s important to stay current on legislation in order to plan effectively.

How Credit Shelter Trusts Work

A credit shelter trust, also known as a bypass trust, B trust, exemption trust or family trust, is an irrevocable trust. Like all trusts it consists of a contract between a trustor and a trustee. The trustor is the person who sets up the trust and provides the assets. The trustee is the person charged with overseeing the trust and making sure the terms of the trust are followed. The trust contract lays out all the assets that will be included in the trust. These can be any form of property, including cash, stocks, bonds, real estate and collectibles. The trust documents also describe how these assets will be distributed to the beneficiaries. For instance, a trust may specify that assets won’t be distributed to a beneficiary until he or she reaches a certain age.

A credit shelter trust is created after one partner in a marriage dies. Any assets that are put into the trust are considered separate from the estate of the spouse who is still alive. This allows them to go to the beneficiaries after the surviving spouse’s death without incurring any tax. While the surviving spouse is still alive, he or she can receive income from the assets held in the trust.

Credit Shelter Trust Benefits

A credit shelter trust works as a tax management tool because assets transferred to a surviving spouse are exempt from federal estate taxes. There’s no limit on this amount. After the second spouse dies, taxes would normally be levied on any assets from that spouse’s estate that are passed on to beneficiaries. However, assets placed in a credit shelter trust are not considered part of the surviving spouse’s estate. As a result, they are eligible to pass on to beneficiaries without being taxed after the second spouse dies. Any appreciation in value in the trust assets can also be bequeathed without taxes.

As an example of how this works, consider a married couple with a $15 million estate. Without estate planning, on the death of the second-to-die spouse, the estate would be $3.3 million over the 2021 $11.7 million federal estate tax exemption. At the top tax rate of 40%, the estate would pay $1.32 million on the $3.3 million excess. In addition, there is a base tax of $70,800 charged on the first $11.7 million. Total estate tax would come to $1,390,800. A credit shelter trust would avoid all this tax.

In addition to reducing taxes, a credit shelter trust can help ensure that the surviving spouse honors the wishes of the deceased spouse. The trustee will make sure that terms of the credit shelter trust are followed. For instance, if the first-to-to-die spouse wants part of his or her estate to go to children of a previous marriage, the trust document can specify that. Trust assets are also protected from creditors. And assets placed in the trust don’t have to go through probate.

Credit Shelter Trust Limits

Credit shelter trusts are most useful when each spouse has enough assets to reach the amount of the estate tax exemption. They are not generally used when estates are less than the amount of the exemption.

A credit shelter trust is an irrevocable trust, meaning the terms of the trust cannot be altered. That means the needs of the surviving spouse have to be carefully considered when setting up the trust, since the surviving spouse has limited control over assets in the trust.

Credit shelter trusts also have to file federal income tax returns. This can be time-consuming and costly and has to be provided for in the trust documents.

Bottom Line

A credit shelter trust is one of several different types of trusts, and can be effective tax management tools for estates large enough to trigger the federal estate tax. They can also be helpful for making sure surviving spouses follow a deceased spouse’s instruction for the disposition of assets. Credit shelter trusts can keep assets from going through the time-consuming and costly probate process. And they can shield a married couple’s assets from creditors after one spouse dies.

Tips on Estate Planning

  • Credit shelter trusts are just one tool that can be used for estate planning. Working with an experienced and qualified financial advisor can help make sure your estate is distributed according to your wishes, including minimizing estate taxes. SmartAsset’s free financial advisor matching tool can connect you with up to three local advisors. Get started now.
  • A free, easy-to-use retirement calculator can give you a good estimate of how you are doing in reaching your financial goals.

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Mark Henricks Mark Henricks has reported on personal finance, investing, retirement, entrepreneurship and other topics for more than 30 years. His freelance byline has appeared on CNBC.com and in The Wall Street Journal, The New York Times, The Washington Post, Kiplinger’s Personal Finance and other leading publications. Mark has written books including, “Not Just A Living: The Complete Guide to Creating a Business That Gives You A Life.” His favorite reporting is the kind that helps ordinary people increase their personal wealth and life satisfaction. A graduate of the University of Texas journalism program, he lives in Austin, Texas. In his spare time he enjoys reading, volunteering, performing in an acoustic music duo, whitewater kayaking, wilderness backpacking and competing in triathlons.

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Why We Need A Will And A Power Of Attorney

When you hear, ‘estate planning’ what is the first thing that comes to mind? For most of us, we may default to the process of dispersing physical assets such as homes or cars. While this indeed does apply, estate planning in general captures so much more.  It also determines how a person’s assets will be preserved, managed, and distributed after their death if they become impaired.

Planning is everything and this includes discussing what happens as we all naturally age. Who will be in charge of our affairs? What happens if I’m unable to make sound decisions on my own behalf? Where and how should I distribute my money and other assets? It is never too early to begin this process and begin answering these questions.

What is the purpose of a will and why is it important?

A will is a living document that explicitly lists all assets and debts tied to a specific person. Not only is this document a necessity to ensure every wish is respected after a person’s death – it guarantees everything is divided and dispersed as outlined. This can be limited to one person or multiple people such as a spouse, children, friends, or a charitable organization. A will is also leveraged to appoint a legal guardian to care for minors, if applicable.

When should I create a will?

Anyone can create a will at any time and it’s typically best to plan ahead and create one soon as you feel the need to or when you acquire important assets. Please note that you can update, change, or cancel the will at any time. Certain major life events may also require changes to a will such as the purchase of a home, marriage, or expanding your family with children. This is one of the best times to replace or make any additions.

How do I create a will?

Making a will isn’t difficult or expensive. It takes time and effort, but it isn’t as daunting as many may paint it out to be. Here are a couple different methods:

Write it yourself. A will is legally binding if you write and sign it. To ensure the document is legally binding, be sure to research the law in your specific state for details. It’s best to have a notary present to witness to avoid any hiccups for your executors in the future.

Use the expertise of legal counsel. You can always leverage this option to ensure you do not miss any pertinent details. A paralegal or lawyer will be able to address things you may have not considered. Often times law firms can store these documents safely as well.

Once the will is written, you should store it in a location that your loved ones and executors can easily locate. You can keep it at home with other important documents, preferably in a fireproof box, or a safe deposit box. The key here is to make sure it is accessible. If the location of the document changes due to moving or emergency – make sure the people that need to know where it is can locate it with no issues or hassle.

What is a power of attorney?

A power of attorney is a mandate given by one person (the grantor or principal) to another person (the agent) to represent him or her in an action. In other words, it is the power granted to act and make decisions on the agent’s behalf if they become incapacitated.

There are four different types which we’ll explore.

General Power of Attorney: In this scenario, the agent can perform almost every act as the principal, such as opening bank accounts and managing personal finances. A general power of attorney arrangement is no longer valid when the principal becomes incapacitated, removes the power of attorney or passes away.

Durable Power of Attorney: This specific arrangement designates another person to act on the principal’s behalf and includes a clause that allows the agent to maintain the power of attorney before, during, or after the principal becomes incapacitated.

Special or Limited Power of Attorney: In this instance, the agent has specific powers limited to a certain area or category. An example is a power of attorney that grants a person the authority to sell their home or real estate.

Springing Durable Power of Attorney: In some states, a springing power of attorney is available and becomes effective when an unfortunate event occurs, resulting in the principal becoming incapacitated.

What makes a power of attorney document valid?

The grantor must be mentally competent when they sign the power of attorney. The process of having witnesses sign the document also helps to ensure that it’s 100% authentic, no coercion is taking place and everyone involved is competent. Also, you need to notarize their signatures, further strengthening credibility.

What is the process to complete power of attorney documentation?

Obtain the required forms: Either from a local lawyer’s office or via any source that offers accurate, legal documents. You can easily find many forms or templates online. You can tweak this documentation to meet your personal needs.

Complete the forms thoroughly: If you have any questions or concerns, don’t hesitate to consult a lawyer before completing this agreement. Be sure to review this documentation with your appointed agent(s) to ensure everything is concise and clear.

Have the papers notarized: With your agent, sign the papers in the presence of a notary. Local banks and law offices typically have them available. Similarly to the wills, make copies of the agreement and file them in safe places. You should store all of your estate planning documentation n a central location.

While it’s never easy to discuss these topics as you age, it provides a different level of peace of mind.  Ensuring your loved ones are aware of your wishes beforehand creates a smoother, less stressful process.

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