Estate Planning Historically Facilitated with Trusts

In 16th century England, wealth and power were largely a matter of how much land an individual owned. The king paid close attention to the inheritance of land to limit anyone from becoming too powerful. Land transfers following a death were governed by the king's courts in an expensive process on which our modern system of probate is based.

Eventually, some landowners used trusts to help avoid the king’s probate. A landowner would deed his property to the church, which held it in trust during his lifetime and promised to return the land to the owner’s heirs after his death.

The Function of Trusts in Modern Estate Planning

Trusts of all types are still used to help avoid probate and reduce taxes. Here are two common trusts that you may want to consider in your estate planning.

A-B Trust

A living trust with an A-B provision doubles the amount of an estate that married couples can exempt from taxes. When the first spouse dies, the assets of the survivor are transferred to Trust A, and the assets of the deceased spouse go to Trust B. Each trust becomes a taxable entity entitled to the unified credit exemption (currently $1 million) and is exempt from probate. Without a properly structured bypass trust, the couple could use the estate tax exemption only once.

Life Insurance Trusts

When you acquire assets, if you don’t complete paperwork to place them in your trust, you may not reap the full benefit of the trust.

We had heard about annuities and were investigating them for our IRAs. We also heard bad things about pushy brokers over the years. So when we went to the ImmediateAnnuities.com site we were skeptical about calling them. But whenever we called their staff was really friendly. They answered all our questions and one of their reps even told us that at our ages there was no advantage to buying the annuity with our IRAs. These guys are really honest!

Fred and Gloria Pollard

Read 650+ verified reviews

One potential way to avoid this problem is to own a life insurance policy inside an irrevocable life insurance trust so that the death benefit does not become part of your taxable estate. Your heirs can use the proceeds to help pay any estate taxes, perhaps eliminating the need to sell assets. Most people would rather leave the bulk of their estate to their heirs than to the government. With a trust, you may be able to shield more of your assets from taxes and the often costly probate process.

Remember when using Trusts for Estate Planning

The use of trusts involves a complex web of tax rules and regulations. You should consult with an experienced tax, legal, or estate planning professional before implementing such strategies.

The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. Before implementing a strategy involving life insurance, it would be prudent to make sure that you are insurable by having the policy approved. As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. In addition, if a policy is surrendered prematurely, there may be surrender charges and income tax implications.