Estate Planning using Trusts

Did you know that nearly 25 percent of people over 50 have a living trust? As part of a well-defined estate conservation plan, trusts can help preserve more of your assets for your loved ones and avoid the delays and costs of probate.

Estate Planning and Trust Options

A trust is a legal arrangement under which one person or institution controls property given by another person for the benefit of a third party. If you currently don’t have a trust or you’re unsure whether your trust offers the right protection, you may want to learn more about A-B (bypass) trusts, irrevocable trusts, and life insurance trusts. Working together, these three types of trusts can help safeguard your legacy.

A-B Trusts

A living trust with a properly structured A-B provision can allow married couples to exempt twice as much of their estate from taxes as they could without a bypass trust. When one spouse dies, the trust is split in two. The assets of the surviving spouse are transferred to the A trust, while the assets of the deceased spouse go to the B trust. Each trust becomes a taxable entity entitled to the current estate tax exemption ($1 million in 2002 and 2003).

Irrevocable Trusts

When you establish an irrevocable trust, you relinquish control of your assets while you’re living. Although irrevocable trusts can protect your estate from taxes on assets valued above the estate tax exemption, you may want to consider this option carefully because it means giving up control of your assets during your lifetime.

Life Insurance Trusts

If relinquishing control of your assets doesn’t appeal to you, consider establishing a life insurance trust to pay the estate taxes on assets valued above the estate tax exemption amount. A life insurance trust holds an insurance policy in an irrevocable trust, so the policy itself is not taxable. It can help give your beneficiaries the cash they may need to pay estate taxes, perhaps eliminating the need to sell assets.

As with all the elements of your estate conservation plan, trusts should be reexamined regularly so that new assets can be added and beneficiaries updated.

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In addition, the cost and availability of life insurance depends 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.

Estate Planning using Trusts can be Complicated

Remember, the use of trusts involves a complex web of tax rules and regulations. You should consider the counsel of an experienced estate planning professional and tax attorney before implementing such strategies.