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| Creighton F. Klute - Mark A. Miller - John C. Johnson Wills, "POA"s and Trusts A will or trust is like a list of instructions you give to your babysitter before leaving the house for the evening. If you have minor children, you should name a guardian for your children in case of your death, which can only be done in a will. Your instructions for the disposition of your property may be in your will, or may be in your "living" trust. If you have a living trust, you will use a pourover will, to make sure that any assets that are outside your trust when you die are "poured over" into your trust, to be held or distributed as provided in your trust. Along with a will, everyone should have a durable power of attorney, in which you name an agent (usually your spouse, then an alternate) to act for you with respect to your property and financial matters if you are disabled. You should have a power of attorney even if you also have a living trust, to deal with assets outside the trust, the filing of personal tax returns, and the like. You should also have a power of attorney for health care, or patient advocate designation, in which you name an agent, or patient advocate (usually your spouse, then a child), to make medical treatment or personal care decisions for you if you are not able to. In addition, you can set forth in writing your desire not to be kept alive through life-sustaining treatment if you are terminally ill, and the burden of continued treatment to keep you alive outweighs any possible benefit of such treatment. You may also want a trust, through which property is held for someone's benefit and protection .If you have minor children, and especially if you're a single parent, you should consider a contingent family trust for the protection of your children if you and your spouse should both die before your children are grown. In that case, depending upon the size of your estate and your wishes, your estate can be kept in a single or pot trust for all of your children until your youngest child has reached a certain age or graduated from college, and then divided into separate, equal shares for each of your children. At that point, your children can receive their inheritances outright all at one time, or at intervals. You should consider how much protection for your children you want to build into their trusts. If you are older, have health problems, or for other reasons, you may wish to have a revocable, "living" trust. To the extent that you transfer your assets into this trust while you are alive, you will avoid probate after your death. More importantly, such a trust can be a good vehicle for the management of your assets (and your protection) while you are still alive, but disabled or otherwise incapacitated. As long as you are competent, you can change the terms of your trust anytime you want to, and as long as you or your spouse is one of the trustees (which is usually the case), you do not have to treat your trust as a separate taxpayer. Federal Estate Tax We also use trusts to avoid or reduce the federal estate tax for married couples who have larger estates of $675,000 or more (in 2002, up to one million). Gifts between spouses are tax-free, but leaving a large estate to a spouse without planning may cost substantial taxes when that spouse dies. The type of trust we use for this purpose is called a bypass trust, also called a family trust, or credit shelter trust. Although confusing at first, the concept is actually quite simple. A husband and wife each sign their own trust document, which contains provisions for a bypass trust to be established after the death of the first spouse to die. Then, instead of owning everything jointly, the husband and wife divide their assets between themselves so they each have a separate "taxable" estate; otherwise, instead of being available to fund the bypass trust after a spouse's death, the property would all pass to the surviving spouse as surviving joint tenant. The tax savings results from the fact that when the surviving spouse dies, the "exempt" property of the first spouse to die, plus any growth in the value of those assets following the first spouse's death, is held in that spouse's bypass trust rather than being included in the survivor's estate; for tax purposes, it "bypass"es the survivor's estate at his or her death. Even though the assets in the bypass trust are "taxed" for federal estate tax purposes at the first spouse's death, no tax is due because of that spouse's "exemption." If the first spouse has an estate that exceeds the exemption amount, the "excess" may be left for the surviving spouse, passing free of tax under the so-called "marital deduction." Other Types of Trusts There are many other types of trusts. For example, you may need a supplemental needs trust for a disabled child to protect the child's funds from state and federal agencies and other creditors. People who are charitably motivated may benefit from a charitable remainder trust , paying them income as long as they are alive, with the remainder going to a charity or charities after their deaths. A fairly common type of trust is called an irrevocable life insurance trust. Even with bypass trusts, if a couple's total estate (including life insurance) exceeds two times the exemption amount, the life insurance may be subject to federal estate tax at rates beginning at 37% and going as high as 55%. In other words, a large percentage of the life insurance premium dollar would "purchase" a sizable tax payment to the IRS, rather than the intended life insurance benefits. Instead, placing the life insurance in an irrevocable trust can keep the life insurance out of both spouses' estates, avoiding any federal estate tax on the full amount of the life insurance. Retirement Plans Increasingly, peoples' estates include significant retirement savings in tax-advantaged retirement plans, such as 401(k)s and IRAs. It is important that you understand as much as you can about your options and legal requirements in taking distributions from these plans, and to discuss these issues with someone who is knowledgeable about retirement plan distributions. The Taxpayer Relief Act of 1997 created a new IRA called the Roth IRA. The Roth IRA presents new estate planning and income tax planning opportunities for many taxpayers. Instead of saving taxes when you contribute to your account (savings that are usually spent rather than saved) as with a traditional IRA, contributions to a Roth IRA are not tax-deductible, but all amounts in a Roth thereafter grow tax-free , and are generally income-tax-free to the recipient. Also, the Roth IRA owner is not required to receive any required distributions during his or her lifetime. Thus, substantial income-tax-free growth may occur for many years. For many people, this is an excellent retirement vehicle, especially for high-growth assets, not as a substitute for employer-sponsored plans, but in addition to those plans. Creighton F. Klute - Mark A. Miller - John C. Johnson ...enthusiastically committed to helping you achieve your personal and business goals through timely, responsive legal service... characterized by excellence. Court Place - Suite 101
Contact Us Now: 269.983.1000
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