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Family Services: Trust
FAMILY TRUST
A family trust—also known as a “B Trust”, a credit shelter trust, or a Bypass Trust— is an excellent way of passing money on to children upon the death of the second spouse while saving significantly on estate taxes. If an individual leaves their estate to charities or to a surviving spouse, no estate tax will be paid regardless of how large the estate is. However, upon the death of the surviving spouse, the other children or other heirs may be subject to estate taxes.

By placing assets into a family trust, assets and income are still available to the surviving spouse, and up to $2 million can be passed on to children without subjecting the money to estate taxes upon the death of the second spouse.

Among the main advantages of a family trust are the following:

  • Setting Aside a Significant Amount in Trust. Current maximum of $1 million, increasing in the next few years.

  • Federal Estate Tax Savings. The assets of the trust are not taxed in the estates of either spouse.

  • Significant Access to Income and Principal. The beneficiaries may receive all income; and liberal amounts of principal may also be withdrawn (up to 5% of the value of the trust, annually, on demand; and more at the discretion of the trustee).

  • Gifts of Trust Assets By the Surviving Spouse.

  • Control of the Assets at Death By the Surviving Spouse.

  • Opportunities for Postmortem Estate Planning. Funding the trust with assets that have appreciation potential.

  • “Sprinkling” Income Among the Beneficiaries.

A family trust is one of the most commonly used, most versatile, and most effective estate planning tools. But for the uninitiated and the under-informed, it’s also the source of much unnecessary confusion and concern. Here is an example of how it works:

Martha dies in 2006. Under the terms of her will, she leaves $1 million in a trust for the benefit of her husband, George. He will receive all of the income from the trust for the rest of his life. Assuming that the assets are invested to achieve a net return (exclusive of capital gains) of 6%, George will get about $60,000 in income from the trust each year.

In addition, George may withdraw the greater of $5,000 or 5% of the value of the trust assets each year. Assuming the trust either stays at $1 million or (more likely) grows over time, George may withdraw at least $50,000 from the trust each year. Also, if George needs additional funds, he may ask the trustee for more.

George may also make gifts from the trust to his three children, because he has a “special power of appointment” to do so, under the terms of Martha’s will. (Powers of appointment are technical in nature, and require careful drafting by an estate planning attorney.) At his death, George may also specify, in his will, who will receive the assets of the trust.

Thus, it’s obvious that George has significant access to the trust, and it will not be taxed in his estate when he dies, regardless of how much it has grown.

Revocable Living Trust

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