<p>How can it be tax free? Does the trust pay the tax? Tax rate on trust is higher than individual’s. Most trust distribute income to beneficiaries to lower taxes from what I understand.</p>
<p>I guess tax free in the withdrawal but the trust pays taxes within the trust? Or maybe he meant those are the only allowable withdrawals? Like I said, I don’t understand trusts, and I definitely have a bias against them from my lower middle class upbringing. There would not have been federal estate tax on her estate anyway, now the money will be tied up in restrictive trusts I don’t understand (and my H understands even less than I do)</p>
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<p>That’s usually how irrevocable trust agreements are written. It allows distributions covering basic needs of beneficiaries, health, edicaution, etc. If your in-laws are still alive, they can redo the trusts.</p>
<p>I think “tax free” just refers to the gift tax. Someone can pay virtually unlimited amounts for another person’s educational or medical expenses without worrying about it being factored in to the gift tax exclusion. But as mentioned, the amount you need to give away before triggering a gift tax is over $5 million, so very few people need to worry about it. However if you pay someone’s educational/medical bills directly you don’t even need to file a gift tax form if the amount goes over $14,000. </p>
<p>Re my mom…H & I are both CPAs, so we know the rules. </p>
<p>Trusts are separate animals and are each unique beings, so the terms of the trust will determine if the beneficiary will just receive income or if they can receive principal payments and over what period. The plus of a trust is it directs exactly what happens and the funds stay out of probate. The principal, however, will be in the taxable estate. (A life insurance trust is different, as the trust is the owner of the policy, not the insured). I worked on trust taxes as an intern in college. At that time, trusts were generally taxed on an individual basis, including capital gains. They aren’t horrible, but management and trustees fees can add up quickly. Be very careful if an institution (ie, bank) is named as trustee, as they will be loathe to sign over the account, as they are very profitable. It’s genrally best to have a family member as trustee, as you can then choose the institution to manage the funds. </p>
<p>Estate Planning:</p>
<p>Although there is no assurance that Congress won’t change the law in the future, it’s safe to assume for present estate planning that the “unitary” gift and estate tax exclusion of $5.34 million per person is the one to follow. That’s what I’m doing, with an eye out for tax law changes. I think any estate planning done before the current system was put in place should be reviewed. </p>
<p>As mentioned before, the annual gift exclusion is $14,000 per person and so long as gifts stay within that amount each year, there are no annual gift tax form to file. Direct payment of tuition are definitely not counted in that $14,000.00.</p>
<p>Estate Planning and Administration:</p>
<p>Real estate transfer: in our experience, there was a living revocable trust – which had been popularly promoted as a means to “avoid probate” and my ILs had transferred title of their house to the LRT and the recorded deed reflected that (very important). When we sold their house after their deaths, the title search reflected the fact that the LRT owned the house and it was a simple matter of furnishing a certificate of trust (prepared at the same time as the LRT) demonstrating who the current trustee was and the sale of the house went through smoothly. We did not have to probate each of their estates to sell the house. </p>
<p>The LRT proved to be a problem because of poorly drafted language dealing with the residual of the ILs estates. There were conflicting dispositions.</p>
<p>Lesson is: if you do want to take advantage of a trust (or trusts) as a means of disposing your estate, you really have to understand what is being done. The ILs told their sons what they were doing, but no one else looked at the documents until after their deaths (and I was not going to intervene while they were alive). Luckily I was able to sort things out with help of an estate attorney (but legal fees went into the high 4 figures even with me doing most of the day-to-day administrative work). </p>
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<p>I am sure nj2011’s attorney did this correctly, but for readers, if you want the life insurance not to be part of your estate, the trust must be irrevocable and the trustee must be someone other than you & that trustee upon receiving the gift $ to use for premium payments must have the ability to use it for anything they want. It must be a completed gift, meaning they have full authority over the funds.</p>
<p>somemom,</p>
<p>If I understand you correctly, the gift to the trustee to pay the premium on the life insurance cannot be earmarked or restricted to pay the premium. So, presumably the recipient could use it for anything else and fail to pay the premium? Also, what if the premium exceeds the annual $14,000 limit? </p>
<p>Right, the trustee technically must have the freedom to choose to pay the premium or not.
I think in most cases the excess premium, above the annual gift exclusion could be done via a gift and use the lifetime gift amount, but remember, husband and wife can each give $14k to the trustee and spouse. For example, if I had a trust like that, I could gift $14k to DD and $14k to her DH and my DH could do the same, so $56k from us to them.</p>
<p>Trusts 101…</p>
<p><a href=“Revocable vs. Irrevocable Living Trusts”>http://wills.about.com/od/overviewoftrusts/a/revvirrvtrs.htm</a></p>
<p>Thanks @somemom, yes, I see how you can piggyback gifts to increase to $56,000. </p>
<p>For everyone, there are differing considerations and solutions</p>
<p>(1) simplifying the estate as we age – consolidating accounts, POA, account housekeeping, trusts, etc.</p>
<p>(2) getting the inheritance to the individual(s) you want to get it with a minimum of fuss and transfer expense (tax or otherwise) – TOD, living trust, etc. All while making sure your wishes are carried out. </p>
<p>(3) making sure the recipient doesn’t squander the money if he/she is too young, irresponsible, incapable, etc. – trust, etc. </p>
<p>(3) keeping the inheritance away from creditors of the recipient – trust, etc.</p>
<p>(4) ease of administration – reducing the number of accounts and making sure current accounts and documents are accessible to survivors. Then the ongoing costs, etc. of administering the estate plan for the next generation if trusts are involved.</p>
<p>All of the above considerations (and others I’m sure I’ve missed) are relevant even if the estate is <$5.34 million per person or $10.68 million per couple. The amount of money any of us considers “life-changing” varies by age and circumstance. </p>
<p>(5) reduction of the taxable estate if you and spouse begin to approach the maximum exclusion and then considering again (1) through (4) – annual gifts, estate planning trusts, etc. – so as to minimize the Federal and state estate tax bite.</p>
<p>BTW, the Ed Slott book mentioned on the Retirement Income thread is a good resource for IRA inheritance. He also has a website. </p>
<p>@AttorneyMother - I’m curious what you think of survivorship insurance to pay estate taxes on the portion over the $5.34M exception?The premiums are pretty hefty initially, but if invested well enough, the policy starts to pay its own costs mid-way through.</p>
<p>@Gourmetmom. (I think you have the better moniker, BTW) </p>
<p>I would consider it, but we haven’t consulted with the financial planner yet on specifics and, as you know, the projections have to work out. My worry would be the projected premiums, which presumably would have to be paid out of liquid funds. We are still in the consolidating and housekeeping stage on our estates. Then we’ll have to sit down with an FP and estate lawyer to draw up documents. The challenge for me is getting my ILs’ estates settled this year so that there won’t be 2015 income, etc., albeit not too consequential. </p>
<p>But your “problem” is a good one to have. :)</p>
<p>Maybe someone else who has completed the planning stage will chime in. </p>
<p>Timely thread. I just visited my father and worked on some of these issues. I researched and discovered that he could change his house deed to a beneficiary deed and name the beneficiaries upon death. I also did research on his bank accounts to see if we could add someone to the account to avoid issues if he becomes unable to pay his bills. Unfortunately less than a week later he ended up in the hospital and we haven’t been able to make some of these changes. I’m hoping he gets well enough to get the required documents notarized before anything else happens. </p>
<p>It wasn’t difficult to ask him what he wanted, and he wants to make it easy on us, so we are trying to do things to make it easier. He had already added all the kids to his Fidelity accounts as beneficiaries, so if we can get the house and bank accounts figured out, then hopefully we will be in good shape.</p>
<p>We’ve had a policy for about 15 years now. This is a combination of whole life and term insurance, where eventually the earnings of the whole life portion cover the premium and buy enough insurance that the term portion is no longer necessary. Not sure if I described that very well, but that’s my understanding. For first few years the whole life portion did not do well because of market conditions, but in the last few years we have seen our premiums decline to the point that we could skip an annual payment every so often. If estate tax laws change, I could see reducing it…but probably not eliminating it completely - if we ever had to reinstate the policy the premiums would be much higher now that we are older.</p>
<p>@VAMom2015 </p>
<p>I’m sorry to hear about your father and I hope he recovers. Perhaps you can ask a notary (or estate lawyer who is usually also a notary public) to visit him and get the documents executed and notarized.</p>
<p>In my experience, Fidelity was very easy to deal with. If you haven’t already, you should establish online access so that you can confirm the beneficiary designations are all in order. Just make sure that changing them on one account does not affect designations on other accounts. If you have a photocopy of the beneficiary designations, all the better. </p>
<p>When I dealt with Fidelity after the ILs’ deaths, it was straightforward because the designations were valid and in place. All that was required was the death certificate for the transfer to be carried out. Fidelity was also very sophisticated and cooperative when we implemented disclaimers to get the accounts descended another level down. </p>
<p>We have a term policy on H as well as a hybrid fully paid up whole life policy H bought long before he an I met. He gets annual return of premium checks that pay the premium on his remaining term policy. The amounts of the term policy will help with adjusting to the lower pension if I survive him. (We are 15 years apart, and my family tends to live up to and beyond 100!)</p>
<p>We have no intention of buying any additional insurance at this point. </p>
<p>We gifted assets at the end of 2012 to our children in an irrevocable trust. Folks should consider doing this to decrease the value of ones estate rather than worrying about exceeding the $10.5 M per Couple…and insurance policies. Of course, this may depend on your age, the age of your heirs, and your comfort zone for making transfers. Spending a few thousand dollars with an attorney to get your house in order is the best thing you can possibly do for your family, the future. </p>
<p>For those whose estates are over the exemptions…One can legally gift $14K to anyone,even to people you don’t know, to reduce your estate. For example, my H and I can gift $28K to my D and S, then we can also gift $28K to my niece and nephew. My brother and his wife then in turn, gift $28K to each of my children. You can exchange unlimited “gifts” with trusted family members and friends. One can quickly reduce one’s estate this way.</p>
<p>“For those whose estates are over the exemptions…One can legally gift $14K to anyone,even to people you don’t know, to reduce your estate. For example, my H and I can gift $28K to my D and S, then we can also gift $28K to my niece and nephew. My brother and his wife then in turn, gift $28K to each of my children. You can exchange unlimited “gifts” with trusted family members and friends. One can quickly reduce one’s estate this way.”</p>
<p>That’s interesting. Never thought of that. Though I don’t have anyone else in the family with a big enough estate to be concerned about that, it is an interesting concept. Of course, you could always pay many people’s bills for different things, and I doubt that could be counted. It really is an honor system. You could pay for college bills, grandkids college bills, etc.</p>