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Worried about estate taxes?
Dear Dollar Diva,
What is a trust?
A trust is a legal arrangement in which a grantor
(the person creating the trust) gives control of his property to
a trustee (an individual or organization, such as a bank), who holds
or manages the property for the grantor's beneficiaries (or heirs).
Trusts and estate planning are often spoken of in
the same breath because trusts are the best vehicles to bypass estate
taxes, control what's going to happen to your assets when you die,
and avoid probate.
| Probate |
| Probate is a legal process whereby the
court determines what property you have and to whom it's supposed
to go after you die. It can be relatively simple, or complex
and expensive, depending on the state you live in. |
Revocable and Irrevocable Trusts
Trusts are either revocable, which means you can change
your mind, or irrevocable, which means you cannot.
Living and Testamentary Trusts
A living trust is created while the grantor is alive.
This is also called an inter vivos trust, or a trust between living
persons, such as a trust between a parent and his children. A testamentary
trust is created by a will, after the grantor dies.
Here are two trusts that are frequently used in estate
planning:
Credit Shelter or By-Pass Trust
Credit shelter trusts help couples by-pass estate
taxes. Each trust can hold assets with value up to the amount of
the estate tax exemption -- $1 million in 2003.
What happens if a husband dies without a shelter trust,
and their $1 million joint estate suddenly belongs to his wife?
The good news is there's no estate tax. The bad news is she now
has an estate valued at more than the exemption, and if she dies
before she spends it down, there are going to be estate taxes due.
Here's how a credit shelter trust fixes the problem.
A couple with $1 million splits the assets so each of them owns
$500,000. Then, each of them writes a will, leaving his $500,000
estate to the credit shelter trust, rather than to the other spouse.
Let's say the husband dies. His $500,000 goes into the trust instead
of to his wife. Her estate is still $500,000. When she dies, her
estate tax will be less than the exemption, and no estate tax will
be due. Her estate and the assets in the credit shelter trust pass
to the kids tax-free.
Q-Tip Trust
Q-Tip is an acronym for qualified terminable interest
property. This is a marital trust that is set up to give your spouse
the income from your estate, and maybe some of the principal --
but not all of it. This is often used in second marriages when you
want to provide for your current wife, but you also want to be sure
your children from a prior marriage get an inheritance when she
dies. Obviously this doesn't work if your wife is the same age or
younger than those children you're so worried about.
Of course, a trust is a complex legal arrangement
and should only be set up by an attorney who has experience in that
area.
-- Posted: March 15, 2000
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DOROTHY ROSEN has a master's degree in finance, with a specialization in accounting,
from the Kellogg Graduate School at Northwestern University in Evanston,
Ill. Rosen has more than 15 years of experience in the financial arena, serving
in Illinois and Florida as a certified public accountant, financial consultant,
expert witness and educator. She is owner of Dorothy Rosen, CPA, a public
accounting firm that serves individuals and small businesses.
