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Preserving Assets, Planning for the Future
A trust is a very personal and carefully designed document. It may be the best solution for addressing the complexities associated with preserving assets while providing for the future benefit of your heirs and furthering God's work through World In Need International.
There are two broad types of trusts. A living trust takes effect during the owner's lifetime and a testamentary trust takes effect upon the owner's death.
Under certain circumstances, a trust can help you:
Take advantage of tax credits available to you, your estate, and your beneficiaries
Maximize the assets available for distribution to your beneficiaries
Direct the distribution of assets to specified individuals or ministries like World In Need International
Secure the continued care and financial support of loved ones who are elderly, disabled, or financially inexperienced
Provide for loved ones in a way which reduces complexity and cost to them
Minimize court and legal involvement
Ensure ongoing management of assets should you become unable to do so
Achieve giving goals to further the Lord's work
The Revocable Living Trust (RLT) contains language to distribute assets at death just like a will. An RLT, though, is set up during your lifetime, and essentially, all of your assets are transferred into the trust. These assets are then managed and controlled by you. As in a will, the RLT can contain language to set up other trusts should these be desired. The Revocable Living Trust has many advantages over a will, however. The most notable would probably be that it allows you to avoid probate.
The Revocable Living Trust also has the advantage of being private-none of it is subject to public record. In addition, it is much harder to contest successfully.
For a married couple, a Revocable Living Trust works as follows:
An attorney prepares the trust. It contains language to direct, exactly as you desire, the disbursement of funds or property at the death of the second spouse.
Upon creation, ownership of all of your assets, except qualified retirement plans, is generally transferred to the trust.
A simple will is prepared for both spouses, which at death merely transfers any assets that were previously overlooked into the trust.
For tax planning purposes, the Revocable Living Trust also contains language to create a second trust called a Bypass Trust. This trust is not funded initially, but can be funded at the death of the first spouse to reduce future estate taxes.
Both spouses serve as trustees of the Revocable Living Trust during their lifetimes, managing the estate. At the death of the first spouse, the surviving spouse serves as sole trustee of the surviving Revocable Living Trust, and can also serve as personal representative of the estate.
A Charitable Remainder Unitrust (CRUT) eliminates the IRD tax on retirement assets, removes a portion of the assets from the estate for federal estate tax purposes, and at the same time provides income for heirs.
With a CRUT, the donor selects the payout percentage (five percent or more) and a period of time for the unitrust to make distributions to personal beneficiaries. Actual payments are determined by this payout percentage and the value of the assets in the trust. It is revalued each year, and the donor may make additional contributions to the trust.
Many donors choose to pay the unitrust amount to family members for a period of time that will pay out an amount equal to the initial value of the property. For example, a trust which pays 7 percent for 15 years will pay income to family members equal to approximately the initial fair market value of the property. By this method the donor is able to double the total benefits from the property-once to the family through income payments, and once to World In Need International or another ministry through distribution of the principal after all income payments are completed.
One advantage of the Charitable Remainder Unitrust is that the amount remaining in the trust grows tax-free. For example, if a person selects a six percent payout trust, and the trust investments earn eight percent, there will be two percent tax-free growth each year. This tax-free growth can substantially increase the value of the trust over time. And since the selected six percent payout is based on this value, distributions to personal beneficiaries increase proportionally.
The ability of the unitrust to increase both in principal and income payments over a period of years is frequently referred to as an inflation hedge. However, the reverse scenario is also possible. In the above example, if the growth in the trust falls short of the payout (six percent in this instance), then income payments to beneficiaries actually decline with time.
With a Charitable Remainder Trust, assets at death are transferred to a trust. The trust will pay out a set percent of the initial fair market value of the assets to heirs for a period of years. The percent and duration is determined in the estate documents with certain guidelines. At the conclusion of the time set to pay heirs, World In Need International or another charity will receive the remainder of the interest in the trust. The trust assets grow tax-free. The Testamentary Charitable Remainder Trust gives the estate an estate tax deduction on a portion of the assets that go into the trust. It also eliminates any IRD tax exposure from these assets.
A Charitable Remainder Annuity Trust (CRAT) pays a fixed amount annually to a non-charitable beneficiary, with the remainder going to World In Need International or another charity. The donor cannot make additional contributions to this type of trust.
A Charitable Lead Trust is a trust that provides for the payment of an amount annually, or at more frequent intervals, to a designated charity. The amount must equal at least five percent of the initial fair market value of the trust. At the death of the trust creator, or at the end of the designated term of years, the remaining trust principal is distributed to a designated beneficiary or beneficiaries.
A Charitable Lead Annuity Trust (CLAT) is a charitable lead trust that provides a series of guaranteed fixed payments each year of the trust period. The amount of the payments does not change over the period.
A Charitable Lead Unitrust (CLUT) is a charitable lead trust that provides a series of payments that are revalued each year. These payments equal a fixed percentage of the fair market value of the trust property, as revalued annually.
We generally recommend that trusts be considered only if at least $50,000 is available to fund them. Below that amount, administrative expenses are likely to negate much of the benefit.
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This information is designed to provide information and illustration of the subject matters covered. It is not intended, nor should it be used as legal, accounting or other professional advice. It is always a good idea to seek legal and tax advice from your professional advisor(s).