You take care of your family and work hard for the things you’ve acquired. You take the necessary steps to ensure your family is taken care of.
So, why wouldn’t you put the same effort into care for your loved ones after your death?
While estate-planning often requires addressing uncomfortable questions and making tough decisions, it is a way to provide for your loved ones even after your passing. And that’s an objective well worth the effort.
In this context, questions surrounding trusts often come up. It is a common misconception that trusts are only for the uber-wealthy, but that is not true. Many people can benefit from some form of trust in their estate plan.
REVOCABLE TRUSTS (OR LIVING TRUSTS)
A revocable living trust is created during your lifetime and usually takes effect upon your disability or death. It can be changed or revoked at any time prior to then; the main benefit is the flexibility it offers. It serves as a “will substitute” in many cases, but most people will still need a will to name guardians for minor children and to make sure assets pass to the trust at death.
During your life, you maintain control of the assets you put in the trust, and you pay income tax on any income earned by the trust assets. In addition, assets in a revocable trust are included in your taxable estate, as they remain under your control. A revocable trust becomes irrevocable at your death.
While estate-planning often requires uncomfortable questions and making tough decisions, it is a way to provide for your loved ones after your passing.
As a general rule, if the goal is to reduce taxes, the trust must be irrevocable. An irrevocable trust takes effect immediately and can be changed only in very limited circumstances or by court order. Therefore, it’s important for your estate-planning attorney to include as much flexibility as possible when the trust is created.
A key feature of irrevocable trusts is that the assets belong to the trust, so they are not included in your gross estate for the determination of estate taxes because they are no longer owned by the grantor.
IRREVOCABLE LIFE INSURANCE TRUST (ILIT)
An ILIT is a trust funded by one or more insurance policies. Even though a life insurance death benefit is not subject to income tax, it is considered part of your estate for estate tax purposes if you own the policy at your death. An insurance policy death benefit could use a large portion of both your federal and state estate tax exemption if the policy is owned personally.
A wise alternative is to establish an ILIT and name a trustee (you can’t be the trustee, but your spouse or children can). Once it’s established, you give the trust a cash gift used to purchase the life insurance policy with the trust as the owner and beneficiary. Upon your death, the trust receives the death benefit—free of income and estate taxes—and then makes distributions according to the terms of that trust.
CREDIT SHELTER TRUSTS
The purpose of a credit shelter trust is to receive assets from your estate after your death; these assets will be sheltered from the estate tax. Typically, this type of trust is structured so that upon your death, the assets (up to the amount of the federal estate tax exemption amount, $5.45 million for 2016) are transferred to the trust for the benefit of the trust beneficiaries. This allows the assets passing to the trust to escape estate tax in your estate and your spouse’s estate.
Revolution Wealth Advisors is a marketing name for John Robert Mara and Shaun M. Feldeisen in their capacity as representatives of Northwestern Mutual and is not a legal business name. Northwestern Mutual is the marketing name for The Northwestern Mutual Life Insurance Company, Milwaukee, WI (NM) (life and disability insurance, annuities and life insurance with long-term care benefits) and its subsidiaries. John Robert Mara and Shaun M. Feldeisen are Representatives of Northwestern Mutual Wealth Management Company® (NMWMC), Milwaukee, WI (fiduciary and fee-based financial planning services), a subsidiary of NM and federal savings bank. All NMWMC products and services are offered only by properly credentialed Representatives who operate from agency offices of NMWMC. Representatives are Insurance Agents of NM, and Northwestern Long Term Care Insurance Company, Milwaukee, WI (long-term care insurance), a subsidiary of NM, and a Registered Representative of Northwestern Mutual Investment Services, LLC (NMIS) (securities), a subsidiary of NM, broker-dealer, registered investment adviser and member FINRA and SIPC.
This article was originally published in the May–July 2017 issue of Worth.