It is widely expected that Congress will pass a tax cut that includes estate tax breaks, perhaps this year. Even if that happens, though, trusts will continue to be vital for estate planning.
Revocable trusts. In particular, people will continue to use revocable living trusts, so-called because they’re created during the grantor’s lifetime and can be canceled. Assets in revocable living trusts avoid probate, which can be a major issue in some states. Moreover, these trusts make for an easier distribution of assets at death. Even in states where probate isn’t a major issue, having assets in a revocable trust can make for a much smoother transition if the grantor becomes incompetent. In case of incapacity, a doctor may attest that you no longer can handle your own affairs and a successor trustee can step in, with no need for hearings by a court. These trusts will work only if you actually transfer assets into the trust. With a revocable trust you can be the trustee as well as the beneficiary, so you have control over the trust assets, the use of any income, and the right to cancel the trust, if you change your mind.
Irrevocable trusts. For tax shelter, you need irrevocable trusts. A family trust can be paired with a marital trust. In a basic plan, the family trust holds assets that are passed to the next generation when the first spouse dies. Commonly, it is funded up to the amount of assets that can pass, tax-free, which is $675,000 in 2001. Under current law, that amount will increase to $1 million by 2006. The decedent’s other assets are left to the marital trust.
Because one bequest (family trust) is sheltered by a tax credit and the other bequest (marital trust) is sheltered by an unlimited marital deduction, no estate tax will be due at the first spouse’s death. The surviving spouse is usually named a beneficiary of both trusts, giving her access to all the marital property, if needed. This process is meant to remove some assets from the reach of estate tax while deferring any estate tax that must be paid until the second spouse’s death. But what if the estate tax shelter is increased to, say, $2 million or $3 million, removing most estates from any tax
obligation? Some irrevocable trusts still will make sense. With an inheritance held in trust, children won’t be tempted to squander their money and the surviving spouse can be protected from predators.
