If you can afford to leave your spouse, kids or significant others a very large pile of money to spend when you are no longer around, you might want to skip the expense and inconvenience of making a will or setting up a trust. But that’s probably not your best move. Certainly as far as your beneficiaries are concerned. But if you leave them with a substantial cash stash to spend after your demise they may get by fine, while the courts decide what’s what and who’s who in your financial life. If you leave enough, they will probably get by until the courts take over and handle the matter. In six months if you are lucky. Maybe a year if your affairs are complicated, which most are. If you have a house, car(s), debts and credit cards some would say you have an estate.
Eventually a court will settle your estate according to your state’s laws on the subject. Some are better than others. Not having a will and estate plan means some court, a judge or minor officials who know nothing about you will divide your goods according to their guidelines. Maybe not the way you would have done it. In fact, almost certainly not the way you intended.
Although some find it a grim subject, most of the people we leave behind will know what you wanted. A will and an estate plan can reduce or mitigate hard feelings among survivors. Maybe prevent decades-long feuds among children, siblings or spouses over what you wanted. To the question “should you have a will and an estate plan,” the answer, especially if you work or retired from the federal government, is usually yes! Which is why our Your Turnguest today is Tom O’Rourke. He’s a former IRS attorney who now specializes in tax and estate law. The show is live at 10 am EDT on federalnewsnetwork.com or 1500 AM in the Baltimore-Washington area. It will also be archived on our home page, so you can listen later, listen again, or pass it on to a friend. Or all of the above. If you have questions shoot them to me before showtime: firstname.lastname@example.org. Meanwhile, Tom has drawn up a preview of what we’ll be talking about:
Trusts are often thought of as tools for the rich, but are frequently used by individuals with more modest assets. All trusts are vehicles for managing and distributing property or assets. A trust can be used to accomplish any legally permissible goal.
All trusts have three parties. The grantor (also sometimes referred to as the settlor or trustor) is the person who establishes the trust and specifies how assets in the trust are to be held, managed and distributed. The trustee is the person or entity who manages assets held in the trust. The beneficiary or beneficiaries are the person or persons for whom trust property is managed.
There are several broad categories of trusts. A revocable trust is one that can be revoked or changed during the life of the grantor. It is not a separate taxable entity. Rather, it uses the grantor’s social security number as its tax ID number. An irrevocable trust may not be revoked or changed once established. It is a separate taxable entity with its own tax ID number and must file its own income tax return every year. Living, or inter vivos trusts take effect during the life of the grantor. A testamentary trust is one that takes effect following the death of the grantor.
Some of the more commonly used trusts include the following:
A revocable trust is commonly used to avoid probate.
A children’s trust: A trust for the benefit of a minor designed to hold assets for the child’s benefit until they are sufficiently mature to manage for themself.
A special needs trust: Typically used to provide for a handicapped individual who may be receiving government benefits.
A spendthrift trust: This trust protects assets from the claims of a beneficiary’s creditors.
A pet trust provides for the care of a pet after the death of the pet’s owner.
Trusts used to help minimize or avoid estate taxes. Since the federal estate tax laws have been changed to increase the estate tax exemption ($12,060,000 at present), these tax planning trusts are no longer needed unless the value of your assets exceed the exemption amount. Because the estate tax exemption is scheduled to drop to $5 million, persons with assets above this level may still find these tax saving trusts to be useful. Moreover, these trusts can be used to help minimize state estate taxes in states that have an estate tax. Some of the more common types of tax planning trusts include:
Life insurance trust.
The law is sufficiently broad to allow a trust to accomplish any legally permissible goal. If you can clearly identify your goals, you can structure a trust to accomplish these goals.