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Estate Planning
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Spouses are usually equal trustees, meaning that the surviving spouse retains his/her trustee status after the first spouse dies. Some married couples set up a single joint living trust to cover them both, but this limits the ability of the surviving spouse to make changes after the first spouse dies.
The choice of a successor trustee to carry out your instructions when you die is very important, even more important than choosing an executor of a will, because unlike an executor, the trustee will be managing your assets without court oversight. Most people choose their spouse or a trusted friend or relative.
Since a living trust doesn't require that your creditors be notified (as a will does), a creditor could make a claim against the beneficiaries of the trust well after you die.
Be sure that your living trust is in a safe place. Tell your executor, spouse and other important beneficiaries where it is. Have a copy in another safe place, just in case. If it can't be found, it will be the same as if you didn't have it at all.
Although you are able to specify the distribution of nearly all of your assets, there are a few exceptions: life insurance, annuities, and retirement plans such as pensions, IRAs and 401(k)s.
Once you have your living trust set up, it's important to talk to your beneficiaries about it. While the conversation might be a little uncomfortable, it will benefit them in the long run.
Irrevocable Trusts
As mentioned above, a living trust is also called a revocable trust, because it enables the person who sets up the trust to subsequently make changes to it, including revoking it. This section discusses irrevocable trusts, which are similar in that they're also legal entities that hold assets for its beneficiaries and act as instructed by their grantors, but different in that the contributions are irrevocable and therefore cannot be taken out of the trust by the grantor. Given this downside, why would anyone opt for an irrevocable trust rather than a revocable trust? Because they offer tax advantages that revocable trusts don't, for example by enabling you to give money and assets away even before you die.
Of course, you can give away money while you're still living even without a trust. However, there will be tax consequences if the amount is sufficiently large. You can give any amount to your spouse tax-free, and you can give up to $11,000 per year to anyone else without incurring a tax, but above this level you will incur a gift tax, and the amount will usually be the same as the estate tax you would have paid if you bequeathed the gift upon your death. Irrevocable trusts are a way to further reduce the bite of estate taxes.
The rest of this section describes some of the more common types of irrevocable trusts.
Charitable Remainder Trust
The beneficiaries receive the income and the charity receives the principal after a specified period of time. The grantor avoids any capital gains tax on the donated assets, and also gets an income tax deduction for the fair market value of the remainder interest that the trust earned. In addition, the asset is removed from the estate, reducing estate taxes down the road. While the contribution is irrevocable, the grantor may have some control over the way the assets are invested, and may even switch from one charity to another (as long as it's still a qualified charitable organization).
CRTs come in three types: charitable remainder annuity trust (which pays a fixed dollar amount annually), a charitable remainder unitrust (which pays a fixed percentage of the trust's value annually), and a charitable pooled income fund (which is set up by the charity, enabling many donors to contribute).
Charitable Lead Trust
This is similar to a Charitable Remainder Trust, except that the charity receives the income and the beneficiaries receive the principal after a specified period of time.
Credit-Shelter Trust (also called a Family Trust or a Bypass Trust)
This is designed to enable a married couple to effectively double the amount they can protect from estate taxes by setting up a trust with an amount equal to the estate tax exemption ($700,000 in 2002). There are some important restrictions on such trusts, most notably the fact that they can only be funded with assets that the spouses own separately rather than jointly (although retitling circumvents this limitation).
Generation-Skipping Trust (also called a Dynasty Trust)
This enables a grantor to transfer up to $1 million (or $2 million for a married couple) to family members at least two generations younger (usually grandchildren). Grants in excess of this amount are subject to a 55% generation-skipping transfer tax.
Irrevocable Life Insurance Trust
This enables the shielding of life insurance from estate taxes.
Qualified Personal Residence Trust
This enables the shielding of a home from estate taxes
Many of the same suggestions for living trusts also apply for irrevocable trusts: get help from a qualified professional; keep all the relevant documentation in a safe place; choose the trustee carefully; and talk to the beneficiaries about the trust.
Future Healthcare Decisions
Although strictly speaking it's not part of estate planning, another important activity is making decisions about future healthcare. A living will is a description of how you want future healthcare decisions handled in the event that you become incapacitated and are unable to make those decisions on your own. Although this possibility isn't pleasant to think about, it's important to address this issue so that your wishes can be followed even if you aren't able to communicate them at that time. Living wills specify such things as the use of life-sustaining procedures and artificially provided nutrition.
"Durable power of attorney" is a status which you can confer to another person (such as a spouse or other close relative), enabling them to make decisions on your behalf if you can't make them on your own.
An "advance directive" (sometimes called a "healthcare directive") combines a living will and durable power of attorney, either in one document or two separate ones.
In addition to an advance directive, you might also want to consider conferring power of attorney for your assets, to be sure that your financial wishes can be acted on in the event that you become incapacitated.
If you don't have any of these documents set up, the state laws will make these important decisions for you if you ever can't do it on your own.
