Monday, February 21, 2005

To Trust Or Not To Trust: That is the Question

Contrary to popular belief, trusts, wills, and estate plannning are NOT just for the wealthy. Today, more and more individuals concerned with the security of all they've worked for are turning to CPAS, attornies, and insurance agents to plan the distribution of their assets when they're no longer around. Since estate planning is primarily concerned with the disposition of property of an individual in anticipation of his or her own death or incapacity, I believe anyone can benefit from it. Just so that we're on the same page, we'll define an estate as the sum of one's personal and tangible assets-your net worth in other words. Yes, that millon dollar whole life insurance policy goes in there, as well as the Cubs memoribilia you forgot you even had. Boats, the property in Boca, everything.

Most people erroneously think wills and trusts are one and the same. A will will only get you so far in the Kafkan court system. So what is a will exactly?
Wills are the most commonly used legal instruments for the distribution of the tangible assets of a deceased person. Before property can be disposed of pursuant to the terms of a will, the will must be submitted to a probate court which takes jurisdiction of the estate of the deceased. Probate is often considered a relatively lengthy and expensive process, albeit one which may provide greater safeguards with regard to the rights of a deceased person's beneficiariesm, though probate often is contested by creditors or disgruntled members of the family of the deceased who feel they have not received their fair share of the deceased's property.
That is where trusts come in--they mitigate the hassle your heirs may undergo after your passing. In order to bypass probate, you can
place property into a trust before death, often allowing the accomplishment of the objectives of property distribution without coming under the jurisdiction of a court and the possible redistribution after a lengthy contested probate process and trial. Similarly, jointly held property (in common law systems), life insurance, annuities, US Tax Code section 401(k) Retirement Plans or Individual Retirement Accounts will bypass probate.
All this accomplished through your trustee-the individual you decide is "trustworthy" enough to manage your assets for your beneficiaries until a designated time. The trustee is typically a spouse, sibling, or advisor; one's attorney often comes to mind.

Another reason people create trusts is for the tax break they offer. Did you know that after your spouse's passing, your estate will get whacked with an estate tax? After an applicable exempt amount (the applicable exempt amount is currently one and 1/2 million dollars in 2005) the United States federal estate tax very quickly approaches 50% of one's taxable estate. If you're net worth is above 1.5 million, kiss your estate goodbye, papi. The proper use of trusts may reduce your exposure to Uncle Sam. There are only 2 stages in life--building wealth and then preserving it. If you're at stage 2, this loophole has your name all over it. In fact, the government wants you to utilize it--it is what they call a "tax preference item" and what the wealthy call being smart. I'm currently reading Diane Kennedy's great book on the subject, the aptly titled Tax Loopholes of the Rich. Another good one is The AARP Crash Course in Estate Planning: The Essential Guide to Wills, Trusts, and Your Personal Legacy. A Procrastinator's Guide to Estate Planning isn't bad either.

Finally, there is of course the use of a trust as a charitable giving vehicle: One can distribute one's assets to charities and nonprofits by creating an irrevocable charitable trust that will distribute the principal or the income (interest earned) of the trust a la a private foundation. Gifting, as its called, also gets its own tax relief.

Trust trusts--they're legal entitites designed to protect whatever legacy you want to leave behind. Unless you like working for the IRS.

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