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CHOOSE BENEFICIARIES NOW, CHANGE AS DESIRED
BENEFICIARYThe equity, value, or distributions from the trust will benefit the beneficiary. There can be different types of beneficiaries. For instance, income could go to one person for any period of time; and principal could be distributed differently. Beneficiaries could be limited to the benefit for only their life. That would mean that their families (heirs) would not have any rights to any inherited benefits. You could name some of them as remainder beneficiaries anyway. That's the good news. Your choice, your way. Many trusts have "remaindermen" or remainder beneficiaries, who'll receive the trust assets after the trust terminates, or after some of the other beneficiaries are gone. The income beneficiaries and the remainder beneficiaries may be, but don't have to be the same.
In some trusts, the same individual can be creator, trustee, and beneficiary. Thus, he or she has complete control and benefit of the assets, even while the assets are owned by the trust. Even if the creator can't fill all the roles, the trustee and the beneficiary frequently are one and the same. If it is of primary intent to use the trust as a protector of assets; it is best if all positions are NOT filled by the same person.
SELECTING THE BENEFICIARY(s)You can see that the main benefit is to select a method to provide for your beneficiary. Usually, it is your intent to use and enjoy the assets for your lifetime, and then your children. This intent is called a "Life Benefit". This Life Benefit intent usually extends to your spouse. The Trustee can also be a beneficiary.
The main thing to remember is that a Trustee has power, whereas, a beneficiary (in their capacity as beneficiary) has no power. In fact, the reason for any attacks by tax authorities or claims against individuals named as beneficiaries, are usually attempting to determine if you mistakenly gave "power" to the beneficiary; thereby eroding separation and protection of assets held in trust.
Can you be a Trustee AND a Beneficiary? Sometimes, especially if you set up a revocable trust. However, with most irrevocable trusts, where you want tax and asset protection advantages, you should name someone else as trustee, to establish separation of control. Moreover, even if you act as trustee of your own revocable trust, you'll need to name a successor trustee, in the event the original trustee becomes unable to serve.
NAMING BENEFICIARIES ACCORDING TO THEIR NEEDSIf you anticipate an estate-tax obligation, you're often told to reduce your estate by giving away assets during your lifetime. But real life situations aren't always so clear-cut. Suppose you expect to leave a sizable estate but you're not sure that you--and your spouse--will have enough to live on if you give money away now. Naturally, you'll be reluctant to part with assets you might need later.
Even if you decide to give away some assets, to whom would you give them? To the child who already has a family and a promising career, to the emotionally disturbed child who is likely to have lifelong problems, or to the child who is still too young to assess? And once you give away assets, how can you be sure they'll be well conserved?
You can resolve such problems with an irrevocable sprinkle trust.
These trusts can preserve assets for yourself and your spouse, in addition to your children and grandchildren. They enable you to provide for each family member, according to his or her needs, while avoiding gift and estate tax.
The first steps are to establish the trust and fund it. You can transfer up to $600,000 worth of assets to a sprinkle trust free of gift tax. If your spouse goes along with the gift, you can shift up to $1.2 million, tax-free.
Observation: Making large gifts will cut into or use up your $600,000 exemption from estate taxes. However, using this exemption now, while it's still valid, may be a good idea: As Washington sniffs around for new sources of tax revenue, this exemption could be trimmed at any time.
Once assets are shifted to an irrevocable trust, they're out of your taxable estate. If you transfer assets that may appreciate (stocks, real estate), any future growth also is out of your estate. Of course, "irrevocable" means that you can't change your mind. Once you make the transfer, the assets no longer belong to you.
You can name a number of trust beneficiaries, including your spouse, your children and your grandchildren. No beneficiary is entitled to trust income, as a matter of right. Instead, distribution of trust income and principal is entirely at the discretion of the trustee.
The key to an effective sprinkle trust, then, is the selection of a good trustee or trustees. You or your spouse can't be trustees and neither can a child or a grandchild. You may choose an in-law, a friend, a professional advisor an institutional trustee. A trustee must have absolute integrity, common sense and a knowledge of your family circumstances.
Recommendation: When choosing co-trustees, try to pick people who are compatible, so deadlocks can be avoided. Include a provision for selecting successor trustees in case the original trustees die or resign.
Once assets are transferred to the trust, the trustee runs the show. He or she has a broad latitude in distributing trust assets to the beneficiaries. The trustee might, for example, distribute money to your son toward a down payment on a house or to finance your granddaughter's private schooling. If your daughter needs special medical care, the trustee can provide the necessary money. If your own fortune suffers a reversal and you run short of retirement income, the trustee can distribute funds to your spouse.
Observation: The consensus among experienced attorneys is that it is not a good idea to let the trustee make distributions directly to you, the grantor. If the trust documents forbid the trustee to make distributions to you, you avoid any incidents of ownership, and thus deter attempts by the IRS to try to pull the trust assets back into your estate after your death.
If you have the right trustee, a sprinkle trust gives you the best of all worlds. You avoid gift and estate taxes, you provide for your family's future needs and you have a prudent trustee (who is legally required to act responsibly) rather than your family members handling the assets.
There may be income tax advantages as well. Say you have a $400,000 securities portfolio, throwing off $15,000 a year in taxable income. In your possession, that $15,000 is added to all of your other income and taxed at 30% to 40%, including state and local taxes. Your trustee, though, may be distributing the funds to lower-bracket recipients. Example: Your grandson is in college. Money needed for education might be distributed directly to your grandson, rather than to your daughter and son-in-law, who are probably in a higher tax bracket. Moreover, the trust itself has a tax bracket, which means a surplus (income minus distributions) may be taxed at only 15% or 28%.
Recommendation: Consider a sprinkle trust only if you're certain your trustee will serve well and if an experienced attorney handles the trust creation.
STOP US BEFORE WE SPEND MORESpendthrift trusts, as the name implies, are designed to protect beneficiaries who spend every penny they get their hands on, and then some. Known as support trusts in some states, these can also be helpful in providing for someone, usually an adult, who can't manage his or her own finances.
You might expect to control spendthrifts with a strong trustee, who distributes trust funds carefully. However, that may not fully protect a trust beneficiary with a desperate need for funds. There are individuals and organizations who buy out trust beneficiaries, paying them perhaps 20% on the dollar. That is, for a chunk of cash now, a beneficiary might transfer his interest to future income and the distribution of trust principal.
A spendthrift trust forbids the beneficiary from selling or assigning his interest in the trust and places it beyond the reach of creditors. In a typical spendthrift trust, the trustee is instructed not to give large sums outright to the beneficiary, but to use his own discretion. A trustee, for example, could pay the beneficiary's housing costs, utilities, insurance premiums and so on, and perhaps provide a spending allowance as well.
Sometimes a spendthrift trust is not meant to last until termination. A variation is sometimes known as an incentive trust. This might specify that if the beneficiary shows signs of being able to handle money--in the trustee's judgment perhaps as a result of earning a substantial income--the beneficiary can receive more funds from the trust.
Observation: A spendthrift trust also can keep assets from a child's spouse, in case of a divorce.
Spendthrift trusts are not necessarily restricted to children. You may be concerned about your spouse's ability to manage money after your death. It may be hard for her to turn down requests from relatives regarding "business opportunities," unexpected expenses and so on. A spendthrift trust can protect her, preserving lifetime income.
There are, as you might suspect, some limits on spendthrift trusts:
* You can't shift your own assets into a spendthrift trust to protect yourself from creditors.
* In most cases, court orders for child support can't be avoided by means of a spendthrift trust.
With a spendthrift or a support trust, the trustee is expected to provide "necessary" sums for the beneficiaries to live on. This raises the question, "What is necessary?" Help the trustee by spelling out your intentions as specifically as possible in the trust documents.
Caution: Don't put a spendthrift clause into a trust without a good reason. Such a provision may prevent the beneficiaries from terminating a trust that has worn out its usefulness or practicality.
IN BRIEF:* Trusts can preserve assets by preventing family members from squandering money or selling out their trust interests, by keeping money out of divorce negotiations and by moving money out of the reach of creditors.
* Sprinkle trusts allow trustees to distribute money, as needed, among various family members, even to the grantor's spouse.
* With reliable trustee, a sprinkle trust permits you to reduce your taxable estate yet still have access to the trust assets in case of emergency, through your spouse.
* Spendthrift trusts prohibit trust beneficiaries from selling or assigning their future interests in trust assets.
* A spendthrift trust or a sprinkle trust can help your heirs refuse requests for money, without hard feelings, after your death.