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Trust Basics as a Tool for Estate Planning

Trust Basics as a Tool for Estate Planning

Whether you’re seeking to manage your own assets, control how your assets are distributed after your death, or plan for incapacity, trusts can help you accomplish your estate planning goals. Their power is in their versatility. Many types of trusts exist, each designed for a specific purpose.

What is a trust?

A trust is a legal entity that holds assets for the benefit of another. Basically, it’s like a container that holds money or property for somebody else. You can put practically any kind of asset into a trust. This includes cash, stocks, bonds, insurance policies, real estate, and artwork. The assets you choose to put in a trust depend largely on your goals.

For example, if you want the trust to generate income, you may want to put income-producing securities, such as bonds, in your trust. Or, if you want your trust to create a pool of cash that may be accessible to pay any estate taxes due at your death or to provide for your family, you might want to fund your trust with a life insurance policy.

When you create and fund a trust, you are known as the grantor. Or, sometimes known as the settlor or trustor. The grantor names people, known as beneficiaries, who will benefit from the trust. Beneficiaries are usually your family and loved ones but can be anyone, even a charity.

Beneficiaries may receive income from the trust or may have access to the principal of the trust either during your lifetime or after you die. The trustee is responsible for administering the trust, managing the assets, and distributing income and/or principal according to the terms of the trust. Depending on the purpose of the trust, you can name yourself, another person, or an institution, such as a bank, to be the trustee. You can even name more than one trustee if you like.

Why create a trust?

Trusts can be used for many purposes, they are popular estate planning tools. A trust can:

  • Minimize estate taxes
  • Shield assets from potential creditors
  • Avoid the expense and delay of probating your will
  • Preserve assets for your children until they are grown (in case you should die while they are still minors)
  • Create a pool of investments that can be managed by professional money managers
  • Set up a fund for your own support in the event of incapacity
  • Shift part of your income tax burden to beneficiaries in lower tax brackets
  • Provide benefits for charity

The type of trust used, and the mechanics of its creation, will differ depending on what you are trying to accomplish. You may need more than one type of trust to accomplish all of your goals. And since some of the following disadvantages may affect you, discuss the pros and cons of setting up any trust with your attorney and financial professional before you proceed:

  • A trust can be expensive to set up and maintain. trustee fees, professional fees, and filing fees must be paid
  • Depending on the type of trust you choose, you may give up some control over the assets in the trust
  • Maintaining the trust and complying with recording and notice requirements can take up considerable time
  • Income generated by trust assets and not distributed to trust beneficiaries may be taxed at a higher income tax rate than your individual rate

The duties of the trustee

The trustee of the trust is a fiduciary, someone who owes a special duty of loyalty to the beneficiaries. The trustee must act in the best interests of the beneficiaries at all times. They must preserve, protect, and invest the trust assets for the benefit of the beneficiaries. The trustee must also keep complete and accurate records, exercise reasonable care and skill when managing the trust, prudently invest the trust assets, and avoid mixing trust assets with any other assets, especially his or her own. A trustee lacking specialized knowledge can hire professionals such as attorneys, accountants, brokers, and bankers if it is wise to do so. However, the trustee can’t merely delegate responsibilities to someone else.

Although many of the trustee’s duties are established by state law. Others, are defined by the trust document. If you are the trust grantor, you can help determine some of these duties when you set up the trust.

Living (revocable) trust

A living trust is a special type of trust. It’s a legal entity that you create while you’re alive to own property such as your house, a boat, or mutual funds. Property that passes through a living trust is not subject to probate. It doesn’t get treated like the property in your will. Instead, the trustee will transfer the assets to the beneficiaries according to your instructions. The transfer can be immediate. Or if you want to delay the transfer, you can direct that the trustee hold the assets until some specific time.

Living trusts are attractive because they are revocable. You maintain control. You can change the trust or even dissolve it for as long as you live. Living trusts are also private. Unlike a will, a living trust is not part of the public record. No one can review details of the trust documents unless you allow it.

Living trusts can also be used to help you protect and manage your assets if you become incapacitated. If you can no longer handle your own affairs, your trustee (or a successor trustee) steps in and manages your property. Your trustee has a duty to administer the trust according to its terms, and must always act with your best interests in mind. In the absence of a trust, a court could appoint a guardian to manage your property.

Despite these benefits, living trusts have some drawbacks. Assets in a living trust are not protected from creditors, and you are subject to income taxes on income earned by the trust. In addition, you cannot avoid estate taxes using a living trust.

Irrevocable trusts

Unlike a living trust, an irrevocable trust can’t be changed or dissolved once it has been created. You generally can’t remove assets, change beneficiaries, or rewrite any of the terms of the trust. Still, an irrevocable trust is a valuable estate planning tool. First, you transfer assets into the trust–assets you don’t mind losing control over. You may have to pay gift taxes on the value of the property transferred at the time of transfer.

Provided that you have given up control of the property, all of the property in the trust, plus all future appreciation on the property, is out of your taxable estate. That means your ultimate estate tax liability may be less, resulting in more passing to your beneficiaries. Property transferred to your beneficiaries through an irrevocable trust will also avoid probate. As well,, property in an irrevocable trust may be protected from your creditors.

There are many different kinds of irrevocable trusts. There are some trusts have special provisions and are used for special purposes. Some irrevocable trusts hold life insurance policies or personal residences. You can even set up an irrevocable trust to generate income for you.

Testamentary trusts

Trusts can also be established by your will and do not come into existence until your will is probated. At that point, selected assets passing through your will can “pour over” into the trust. From that point on, these trusts work very much like other trusts. The terms of the trust document control how the assets within the trust are managed and distributed to your heirs. You have a say in how the trust terms are written. These types of trusts give you a certain amount of control over how the assets are used, even after your death.

Finding a professional you trust starts here

A trust is a great estate planning tool to manage your assets. If you’re considering adding a trust to your estate planning, Sterling Group can help. We can provide you with the expert financial knowledge to help you make the best decisions for your financial goals. Connect with one of our advisors today for your complimentary consultation.

Disclosure:The content provided in this publication is for informational purposes only. Nothing stated is to be construed as financial or legal advice. Sterling Group United recommends that you seek the advice of a qualified financial, tax, legal, or other professional if you have questions.

Gift and Estate Taxes

Gift and Estate Taxes

If you give away money or property during your life, those transfers may be subject to federal gift and estate tax and perhaps state gift tax. The money and property you own when you die (i.e., your estate) may also be subject to federal gift and estate tax and some form of state death tax. These property transfers may also be subject to generation-skipping transfer taxes. You should understand all of these taxes, especially since the passage of the Economic Growth and Tax Relief Reconciliation Act of 2001 (the 2001 Tax Act), the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the 2010 Tax Act), and the American Taxpayer Relief Act of 2012 (the 2012 Tax Act). The 2001, 2010, and 2012 Tax Acts contain several changes that make estate planning much easier.

Federal gift and estate tax–background

Under pre-2001 Tax Act law, no federal gift and estate tax was imposed on the first $675,000 of combined transfers (those made during life and those made at death). The tax rate tables were unified into one–that is, the same rates applied to gifts made and property owned by persons who died in 2001. Like income tax rates, gift and estate tax rates were graduated. Under this unified system, the recipient of a lifetime gift received a carryover basis in the property received, while the recipient of a bequest, or gift made at death, got a step-up in basis (usually fair market value on the date of death of the person who made the bequest or gift).

The 2001 Tax Act, the 2010 Tax Act, and the 2012 tax Act substantially changed this tax regime.

Federal gift and estate tax–current

The 2001 Tax Act increased the applicable exclusion amount for gift tax purposes to $1 million through 2010. The applicable exclusion amount for estate tax purposes gradually increased over the years until it reached $3.5 million in 2009. The 2010 Tax Act repealed the estate tax for 2010 (and taxpayers received a carryover income tax basis in the property transferred at death), or taxpayers could elect to pay the estate tax (and get the step-up in basis). The 2010 Tax Act also re-unified the gift and estate tax and increased the applicable exclusion amount to $5,120,000 in 2012. The top gift and estate tax rate is 35 percent in 2012. The 2012 Tax Act increased the applicable exclusion amount to $5,250,000 and the top gift and estate tax rate to 40 percent in 2013.

However, many transfers can still be made tax free, including:

  • Gifts to your U.S. citizen spouse; you may give up to $143,000 in 2013 ($139,000 in 2012) tax free to your noncitizen spouse
  • Gifts to qualified charities
  • Gifts totaling up to $14,000 (in 2013, $13,000 in 2012) to any one person or entity during the tax year, or $28,000 (in 2013, $26,000 in 2012) if the gift is made by both you and your spouse (and you are both U.S. citizens)
  • Amounts paid on behalf of any individual as tuition to an educational organization or to any person who provides medical care for an individual

Federal generation-skipping transfer tax

The federal generation-skipping transfer (GST) tax imposes tax on transfers of property you make, either during life or at death, to someone who is two or more generations below you, such as a grandchild. The GST tax is imposed in addition to, not instead of, federal gift and estate tax. You need to be aware of the GST tax if you make cumulative generation-skipping transfers in excess of the GST tax exemption, $5,250,000 in 2013. A flat tax equal to the highest estate tax bracket in effect in the year you make the transfer (40 percent in 2013) is imposed on every transfer you make after your exemption has been exhausted.

State transfer taxes

Currently, Connecticut imposes a gift tax, and a few states impose a generation-skipping transfer tax. Some states also impose a death tax, which could be in the form of estate tax, inheritance tax, or credit estate tax (also known as a sponge or pickup tax). Contact an attorney or your state’s department of revenue or taxation to find out more information

If you are planning to give away money or property at some point in your lifetime, having the right current financial strategies can help you achieve your goals for yourself and the next generation. Call us to learn more about the comprehensive services we can offer to you.

Estate Planning: An Introduction

Estate Planning: An Introduction

By definition, estate planning is a process designed to help you manage and preserve your assets while you are alive, and to conserve and control their distribution after your death according to your goals and objectives. But what estate planning means to you specifically depends on who you are. Your age, health, wealth, lifestyle, life stage, goals, and many other factors determine your particular estate planning needs. For example, you may have a small estate and may be concerned only that certain people receive particular things. A simple will is probably all you’ll need. Or, you may have a large estate, and minimizing any potential estate tax impact is your foremost goal. Here, you’ll need to use more sophisticated techniques in your estate plan, such as a trust.

To help you understand what estate planning means to you, the following sections address some estate planning needs that are common among some very broad groups of individuals. Think of these suggestions as simply a point in the right direction, and then seek professional advice to implement the right plan for you.

Over 18

Since incapacity can strike anyone at anytime, all adults over 18 should consider having:

  • A durable power of attorney: This document lets you name someone to manage your property for you in case you become incapacitated and cannot do so.
  • An advanced medical directive: The three main types of advanced medical directives are (1) a living will, (2) a durable power of attorney for health care (also known as a health-care proxy), and (3) a Do Not Resuscitate order. Be aware that not all states allow each kind of medical directive, so make sure you execute one that will be effective for you.

Young and single

If you’re young and single, you may not need much estate planning. But if you have some material possessions, you should at least write a will. If you don’t, the wealth you leave behind if you die will likely go to your parents, and that might not be what you would want. A will lets you leave your possessions to anyone you choose (e.g., your significant other, siblings, other relatives, or favorite charity).

Unmarried couples

You’ve committed to a life partner but aren’t legally married. For you, a will is essential if you want your property to pass to your partner at your death. Without a will, state law directs that only your closest relatives will inherit your property, and your partner may get nothing. If you share certain property, such as a house or car, you may consider owning the property as joint tenants with rights of survivorship. That way, when one of you dies, the jointly held property will pass to the surviving partner automatically.

Married couples

For many years, married couples had to do careful estate planning, such as the creation of a credit shelter trust, in order to take advantage of their combined federal estate tax exclusions. A new law passed in 2010 allows the executor of a deceased spouse’s estate to transfer any unused estate tax exclusion amount to the surviving spouse without such planning. This provision is effective for estates of decedents dying after December 31, 2010.

You may be inclined to rely on these portability rules for estate tax avoidance, using outright bequests to your spouse instead of traditional trust planning. However, portability should not be relied upon solely for utilization of the first to die’s estate tax exemption, and a credit shelter trust created at the first spouse’s death may still be advantageous for several reasons:

  • Portability may be lost if the surviving spouse remarries and is later widowed again
  • The trust can protect any appreciation of assets from estate tax at the second spouse’s death
  • The trust can provide protection of assets from the reach of the surviving spouse’s creditors
  • Portability does not apply to the generation-skipping transfer (GST) tax, so the trust may be needed to fully leverage the GST exemptions of both spouses

Married couples where one spouse is not a U.S. citizen have special planning concerns. The marital deduction is not allowed if the recipient spouse is a non-citizen spouse (but a $143,000 annual exclusion, for 2013, is allowed). If certain requirements are met, however, a transfer to a qualified domestic trust (QDOT) will qualify for the marital deduction.

Married with children

If you’re married and have children, you and your spouse should each have your own will. For you, wills are vital because you can name a guardian for your minor children in case both of you die simultaneously. If you fail to name a guardian in your will, a court may appoint someone you might not have chosen. Furthermore, without a will, some states dictate that at your death some of your property goes to your children and not to your spouse. If minor children inherit directly, the surviving parent will need court permission to manage the money for them.

You may also want to consult an attorney about establishing a trust to manage your children’s assets in the event that both you and your spouse die at the same time.

You may also need life insurance. Your surviving spouse may not be able to support the family on his or her own and may need to replace your earnings to maintain the family.

Comfortable and looking forward to retirement

If you’re in your 30s, you’re probably feeling comfortable. You’ve accumulated some wealth and you’re thinking about retirement. Here’s where estate planning overlaps with retirement planning. It’s just as important to plan to care for yourself during your retirement as it is to plan to provide for your beneficiaries after your death. You should keep in mind that even though Social Security may be around when you retire, those benefits alone may not provide enough income for your retirement years. Consider saving some of your accumulated wealth using other retirement and deferred vehicles, such as an individual retirement account (IRA).

Wealthy and worried

Depending on the size of your estate, you may need to be concerned about estate taxes.

For 2013, $5,250,000 is effectively exempt from the federal gift and estate tax. Estates over that amount may be subject to the tax at a top rate of 40 percent.

Similarly, there is another tax, called the generation-skipping transfer (GST) tax, that is imposed on transfers of wealth made to grandchildren (and lower generations). For 2013, the GST tax exemption is also $5,250,000, and the top tax rate is 40 percent.

Whether your estate will be subject to state death taxes depends on the size of your estate and the tax laws in effect in the state in which you are domiciled.

Elderly or ill

If you’re elderly or ill, you’ll want to write a will or update your existing one, consider a revocable living trust, and make sure you have a durable power of attorney and a health-care directive. Talk with your family about your wishes, and make sure they have copies of your important papers or know where to locate them.

If you’re ready to start your estate planning, set up an appointment with a financial partner at Sterling Advisor Group. Call us to learn more about the comprehensive services we can offer to you.

Transfer Your Wealth to the Next Generation

Transfer Your Wealth to the Next Generation

Whether you are working to build your wealth or you are ready to start moving it, it pays to think ahead. Knowing how to preserve and transfer your wealth to the next generation is essential, even when you have decades of life still to live.

Work with a Financial Investment Planner

Your goal is to reduce your taxes and potential losses and preserve as much as your wealth as is possible, in most cases. To do this, work closely with a financial planner and an investment professional. He or she can help you develop strategies with the right level of risks. Additionally, you can learn more about trusts that may help reduce your financial loss at the time of your death.

Create a Plan for Annual Gifting

You may benefit from annual gifting, perhaps one of the easiest ways to pass down funds to the next generation during your lifetime. You may be able to make an individual gift to each one of your heirs for as much as $14,000 each year (this value may change over time). Over the long term, this can amount to a significant amount of transfer without any type of risk.

Irrevocable Life Insurance Trusts

This specific type of trust has been a commonly used option for some time, but your tax situation needs to be carefully considered to ensure it fits your goals. In it, you’ll have a life insurance policy that pays into trust. That trust is a legal entity outside of your taxable estate. On an annual basis, you can gift premiums to the trust itself. You can then use this to pay for the policy. This type of trust is beneficial because it reduces some or all estate taxes while also providing you with control over your assets.

Other options exist that could help you better meet your goals. The key is to work with a financial investment team capable of helping you create a comprehensive solution.

Ready to Create Wealth for Your Family?

Having the right financial strategies can help you achieve your goals for yourself and the next generation. Our team at Sterling Financial is here to help you create the plans to make it happen. Call us to learn more about the comprehensive services we can offer to you.

7 Important Reasons You Need an Estate Plan

7 Important Reasons You Need an Estate Plan

Owning a business, having a baby, and nearing retirement are all reasons why you might need an estate plan. Though age is an important factor, there are many other life circumstances to consider when deciding if you need an estate plan. Your health and even the state you live in can have a big impact on your finances. The goal is to protect your assets and care for your family after you’re gone. An estate plan can help do just that.  

More than a will

It’s a common misconception that a will and an estate plan are the same. This is not the case. A will is a straightforward legal document that sets forth how your property will be distributed if you pass away. It may also include who will take care of minor children in the event both parents pass away. An estate plan goes much more in depth. In addition, an estate plan can save your dependents from having to pay burdensome taxes and even court fees.

Children in the picture

The addition of children is a major life event that leads to the need for an estate plan. It can be uncomfortable to ask the question: “What would happen to my children if both parents were to pass away?” It’s an important question to ask to protect your children. Naming a guardian is the first step. Naming a conservator is equally important. This person will manage any assets the child may inherit. Another option when planning with minor children in the picture is to develop a trust, which is professionally managed.

Privacy concerns

A big reason to have an estate plan is to avoid or minimize the probate process. During this process, records become public. Anyone can access information from probate court. If a disgruntled relative got ahold of your records, it could disrupt the process. They could theoretically challenge your will.

Own a business

If you own a business, who will take over after you pass? Don’t leave your employees high and dry by failing to plan for the future. An estate plan will help you strategically structure business assets. If it’s a family business, your planning will take some thought. How will each family member’s role change? How will the assets be divvied up?

Special family circumstances

Families with step-parents pose a unique challenge for estate planning. Will a biological child receive a larger inheritance? These are tough questions, but all the more reason to create a solid estate plan. Blended families are families all the same, but legally, finances can get dicey. Other special family circumstances, like a disability, can prove more difficult after a death if an estate plan isn’t thoughtfully prepared.

Plans for charity

If you have a charity that is near and dear to your heart, you may consider donating some of your assets to that charity when you pass. Many people are proud to leave behind a charitable legacy. If this is the case for you, an estate plan will help you clearly structure which assets and how much will be donated to the charity. Putting it all on paper will ensure your wishes aren’t overlooked.

Life stages

There are many life stages when starting or updating an estate plan is important. As children grow up and leave the house, your finances may change. When you’re nearing retirement age, you may want to consult your financial planner to make sure your estate plan is still structured effectively. Changes in tax law should also prompt you to check in on your plan.

If you’re considering an estate plan but need help getting started, contact the experts at Sterling Advisor Group.

What to Bring to Your Trust and Estate Planning Meeting

What to Bring to Your Trust and Estate Planning Meeting

An estate plan is a way to take care of your family’s future by establishing a will, power of attorney, funeral arrangements and more. Because of all the legalities involved with trust and estate planning, it’s a good idea to work with a professional to ensure it’s done correctly. Together you will analyze the assets that make up your estate, decide who should be the executor and what kind of trust you need. If you’ve scheduled a meeting with a Sterling Advisor Group expert, here’s what you should bring to and what to expect at your meeting.

Personal and Family Information

First and foremost, you will be asked basic personal information about you and your spouse, including previous marriages which will need to be accompanied by a divorce decree. In addition, you will need to indicate your children, their spouses and their children.

Cash Assets

Come prepared with all of your banking information. Include checking accounts, savings accounts and certificates of deposit. For pension and profit-sharing plans, vested amounts and current value will need to be indicated. The same goes for retirement and money market accounts.

Real Estate and Other Assets

In your estate plan, you will need to list your personal residences and any other residences that you own. You may be asked for your mortgage balance and mortgage life insurance information. For personal assets listed in your estate, be sure you know an estimated value of each asset. Common categories include valuable jewelry and antiques, cars, personal effects like furniture, books and pictures of no special value.

Life Insurance Policy

If you and/or your spouse have a life insurance policy, it will be included in your estate plan. Come prepared with all pertinent information regarding your policy, including the company name and address, beneficiary information and cash value.

Business Interest and Other Investments

At your estate planning meeting, you will be asked to describe any closely held business interests, including the type of organization and the nature of the business. Stocks, bonds and other limited partnerships will also need to be indicated.

Family Trust

Any trusts created by you or by any other person in your family will be included in your estate plan. If possible, bring a copy of the trust agreement. If you don’t have your trust established ahead of time, let your financial advisor know so they can prepare necessary documents. You will also need to include estimates of any anticipated inheritances.

Guardians, Executors and Trustees  

During your planning meeting, you will be asked to designate roles. A guardian will take care of your children in the event of your death and/or your spouse’s. An executor will manage your affairs after your death, including asset collection and distribution of property. A trustee will be in charge of long-term management of property held in trust for the benefit of the beneficiaries. It is common to designate the trustee as the same person who is the executor.

Powers of Attorney

If you’re given a power of attorney to your spouse, a child or anyone else giving them authorization to act on your behalf, you must indicate so in your estate plan. You must describe the nature of the power and the location of the document granting the power.

If you’re ready to start your estate planning, set up an appointment with a financial partner at Sterling Advisor Group. For more information on family planning services, contact us today at (480) 729-8000.