Most physicians have heard of trusts,but few have a solid understandingof what a trust is or, more importantly,how a trust can be used to help themsolve problems they face in planningtheir estate. Here are some types oftrusts and situations in which you canconsider using them.
• Revocable living trusts. This is perhapsthe most well-known type of trust,and when properly established andadministered, it can serve as a substitutefor your will. It is used to avoid probate onthe transfer of assets to your beneficiariesafter your death and to provide for ongoingmanagement of all of your financialaffairs if you become disabled prior todeath. However, it does not in and of itselfprovide any asset protection benefits. Thistype of trust is almost always a recommendedsolution for an estate thatexceeds the federal estate tax exemptionamount (currently $1 million).
• Testamentary trusts. These trusts arecreated during your lifetime within a willor revocable trust, but the trust does notactually begin to function until after yourdeath. These trusts are commonly used toprovide financial management for intendedbeneficiaries who will not be able toproperly manage the assets they willinherit. These are commonly used to provideinvestment management and somecontrol over the use of funds for childrennot old enough to prudently handle theseresponsibilities. Testamentary trusts canalso be used to provide financial managementfor a spouse who is unacquaintedwith these responsibilities or for achild who is disabled.
• Insurance trusts. If a family has anestate large enough to be subject toestate tax, it is often a good idea to providefunds to pay that estate tax on aleveraged basis by purchasing an appropriateamount of life insurance. However,insurance you own is part of yourtaxable estate, thereby increasing yourestate tax. Instead of increasing theestate tax by attempting to insure it, it isbetter to set up an irrevocable trust toown the insurance policy. Amounts canbe gifted to the trust annually to pay thepremiums, and at death the full amountof the policy will be available to payestate taxes without the insurance itselfincreasing the tax.
• Charitable trusts. Most peopledonate to charities for altruistic reasonsbut often do not realize that there canbe other benefits to charitable donationsas well. If you have charitabledesires, there are a variety of charitabletrusts that can be utilized to provide yougreater benefits through your charitablegifts. For example, donors frequentlydesire to leave gifts to a charity—perhapstheir church or some other charity—at the time of their death. However,unless the donor has a taxable estate,this gift does not provide any additionalbenefits to the donor.
If you intend to leave money to acharity when you die, consider insteadestablishing a charitable remainder trustfor that amount now. With a charitableremainder trust, the donor establishesan irrevocable trust in the amount theywish to leave to charity at their death.The donor retains the right to receivethe income on the trust assets, most frequentlymeasured as a percentage of thevalue of the trust (eg, 6%). So the donorcontinues to receive the benefit of theassets as if the trust had never been created.Then at death, the assets are transferredto the charitable beneficiaries.
There are 2 important benefits to creatingand funding a charitable trust duringlife for amounts that you intend toleave to charity after death anyway.First, if you transfer appreciated assetsinto the charitable trust, you can avoidor at least substantially defer capitalgains taxes you would otherwise owe onthe appreciation. Second, since the trustis irrevocable, you have made a completedgift to the charity. So the value ofyour gift (discounted based on yourremaining life expectancy and the payoutrate you are receiving) is currentlydeductible as a charitable deduction onyour income tax return. So by advancinga gift that you intend to make anyway,you can avoid capital gains taxes andcreate an income tax deduction.
For example, let's say you create a charitabletrust, transfer $100,000 of appreciatedassets to it on which you avoid capitalgains taxes and retain 6% of the valueof the trust as income to yourself eachyear. In addition to avoiding tax on thegain, you will generate a charitableincome tax deduction of $40,000 to$75,000 depending on your age. Even ifup to now you hadn't planned on leavingmoney to charity, it is worth consideringthese substantial tax benefits, which stillallow you to enjoy the income from yourassets for the rest of your life.
As you assess your estate planningneeds, be sure to completely considerhow trusts can play a part. There aremany possible variations on these basictrust arrangements to address your specificneeds. If you cannot serve as atrustee yourself or want a corporatetrustee to provide an impartial perspectiveand eliminate potential conflicts,you should consider independent trustcompanies. They offer an independenceof perspective on investment issues anda service orientation similar to that ofyour local community banks, so they mayserve you and your family better thanthe big banks' trust company options.
Thomas W. Batterman is president
of the Association of Independent
Trust Companies, a
national organization of more
than 100 chartered, well-capitalized,
and insured members
who manage their clients' financial assets during
life and after death. For more information,