Creating a Trust

Setting up a trust enables you to control how your assets are transferred in a deliberate and potentially tax effective manner.

  1. Potential Direct Financial Impact

    • Potential tax benefits from transferring assets to an irrevocable Grantor Retained Trust (GRAT) or Charitable Remainder Trust (CRAT)
    • Transfer of assets or securities to fund a living trust, or as part of a testamentary trust under your Will.
    • Any costs associated with retitling assets under a living trust.
    • Potential income tax implications (Federal and State) on certain types of trusts that generate and retain income
    • Potential gift taxes or generation-skipping transfer (GST) taxes triggered by the transfer of assets to a trust.
    • Any changes to your net worth, balance sheet, and future estate based on transfer of assets to an irrevocable trust.
    • Funds transferred to an irrevocable trust will have a lock-up.
    • Potential annuity payment received annually from a Grantor Retained Annuity Trust (GRAT) for a fixed period.
    • Potential income tax consequences for distributions from an irrevocable or grantor retained trust.
    • Potential costs associated with securing additional life insurance as part of setting up an Irrevocable Life insurance Trust (ILIT) to pay any estate taxes if it is likely to exceed the estate tax exemption.
  2. Potential Secondary Impacts

    • The need to put a sophisticated estate plan in place to maximize the after-tax value of transfers to your heirs.
    • The need to evaluate strategies to determine the most tax efficient method to transfer assets during your lifetime or as part of your estate.
    • The potential need to bypass the probate process with a trust to avoid having your wishes potentially contested in court. Additionally, the details of your trust including the beneficiaries, terms and assets can remain private.
    • The potential need to transfer assets to an irrevocable trust to reduce the value of your estate and/or to protect assets from creditors. Irrevocable trusts are treated as a separate legal entity for tax and estate purposes.
    • The need to determine the guidelines upon which you would like your assets would transfer to your heirs, such as what age you believe your children and grandchildren would be financially responsible to receive funds from a trust.
    • The need to file IRS tax form 1041 for trusts subject to Federal and State taxes if there is any income for the tax year.
    • The need to file IRS tax form 709 to disclose gifts above the annual gift exclusion to track your gifting up to the lifetime gift tax exemption.
    • The impact of the remaining lifetime gift tax exemption on your estate tax exemption.
    • The potential need to consider the role that charitable contributions and itemized deductions may play into your transfer strategy.
    • The potential need to consider whether you want to set up a trust with a designated caregiver and funds set aside to cover veterinary care, grooming, and daily needs for your pet(s) in the event of your death.
  3. Self Completion/Execution Risks

    • Not outlining parameters to limit access to funds until your heir reaches a specific age, possibly resulting in careless spending.
    • Lost growth opportunity on dollars that could have otherwise been saved or invested.
    • Not optimizing your trust for tax-efficiencies.
    • Not structuring the trust to best serve your family’s needs.
    • Potentially missing out on the step up in basis at death on highly appreciated assets if transferred during your lifetime instead of through your estate.
    • Not safeguarding your wealth with proper estate planning documents, including wills and trusts to ensure you have named a legal guardian and your assets are distributed according to your wishes.
    • Setting up an irrevocable trust only to then realize you cannot get property or funds back that were gifted to the trust.
    • If you die before the end of the term for a grantor retained interest trust, the assets may still be considered part of your estate.
  4. Situations Where Expertise Adds the Most Value

    • Tax Adviser
      Working with a tax advisor can help ensure that you not only understand how to take advantage of the annual gift tax exclusion and file the IRS tax forms to track gifting under the lifetime exclusion, but also identify the types of assets and accounts that are best suited to transfer during your lifetime or as part of your estate. Additionally, a tax advisor may be able to help you understand how to make the most of the 2018 Tax Reform changes that affect trusts.
    • Legal Adviser
      Depending on the complexity of your situation and the value of your estate relative to the estate tax exclusion, working with a trust and estates attorney can pay dividends. It is highly recommended that you set up a trust if you meet any of the following circumstances: have children from a former marriage and are in a second marriage now, have a special needs child, your spouse is not a US citizen and cannot qualify for the unlimited marital transfer, you own real estate in a non-resident state, you are in a non-traditional family situation, you anticipate that your estate will exceed the federal estate tax exemptions, you want to avoid probate and/or you want your estate plan to be private and non-contestable, you plan to leave a significant portion of your assets to a charity and would to realize some tax benefits now, and/or you have assets (or a business) that you plan to gift to your heirs now before they appreciate more to minimize taxes.
    • Financial Adviser
      As your life evolves, it is critical to reassess your financial goals, estate planning needs and insurance coverage. The best way to identify any gaps in your plan and cover your bases is to work with a financial adviser who can look at all of the pieces of your financial picture holistically. Additionally, a financial adviser may be able to help you factor in your legacy planning into your retirement distribution strategy to determine how much you can sustainably withdraw each year during retirement and which accounts to draw down from first.

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