Up until a few years ago, a common estate-planning technique included the use of irrevocable trusts to own life insurance intended for the payment of estate taxes. Properly arranged, this method allowed the policy’s benefits to be used to pay the estate taxes of the person who died without the policy being included in the estate when the estate-tax liability was calculated. Today, this is still a useful technique but not nearly as prevalent. We still have an estate tax. But the threshold for being exposed to the tax has increased so much that only the very wealthy need to be concerned.
Some Americans who are planning their estates for the first time or are revisiting their current estate plans are confused regarding whether trusts remain an important estate planning tool.
One very popular estate planning tool, the revocable trust, remains very much the foundation for many estate plans and is used frequently. In this arrangement, the maker of the trust (the person planning his or her estate) retains total control over the assets, but bypasses probate should the trust maker become incapacitated or die.
Trusts can be funded with a wide variety of assets, too. For example, securities, life-insurance proceeds, and real estate, as well as tangible personal property, are commonly used to fund trusts.
A common use of a trust is to provide income and bequests for the trust maker’s surviving loved ones in a way that recognizes differences among the heirs when they succeed the trust maker as the trust beneficiaries. For instance, the trust could first provide just for the surviving spouse until he or she passes away, then for the children and perhaps the grandchildren. Alternatively, the trust could provide for the spouse and children at the same time. As for the children, a trust can be structured based on the children’s needs. The needs may provide that funds be paid out at specific ages or at a certain time, like when college tuition is due or the birth of a child. Sometimes it is prudent to give sole discretion to the trustee as to when to make payments to the beneficiaries. Guidelines for discretionary payments can be detailed in the trust document.
Another reason trusts are used is asset protection. The trustee is the legal owner of the trust property and the beneficiaries are only beneficial owners. When the beneficiaries (other than the grantor of a revocable trust) have no right to demand the property, then the creditors of the beneficiaries can’t get to the assets.