Randi Newbery, Estate Planning Lawyer, Livingston, New Jersey (Essex County), (973) 992-5034  
A Wealth of Experience, a Record of Results

Trusts: Not Only for the Rich

Many people think that you have to be very wealthy to set up a trust, and it is true that trusts are often created to help the very wealthy minimize their tax burden and pass more of their wealth on to their heirs. However, there are situations in which trusts make sense for people with smaller estates, including a number of non-tax advantages. For example, a trust can enable your estate to avoid probate, set up tax-free gifts to the charities of your choice, or give specific directions to your personal representative or trustee as to how and when to distribute your estate to your heirs. Even if your estate is less than you think might benefit from a trust, it may be wise to consult an experienced estate planning attorney to learn whether a trust could help you achieve your goals. Here are brief overviews of several kinds of trusts which, with the assistance of a knowledgeable estate planning attorney, may help you to achieve both short and long-term goals.

Living Trusts vs. Wills: Get Legal Advice!

Living Trusts are also known as Revocable Living Trusts. In most cases, people choose them in order to keep the disposition of their estates a private matter because once a will is filed it is a public document. A Living Trust may make it harder for someone to contest your final wishes, and less likely that a will contest succeeds. It may also enable the final disposition of your estate to be managed more efficiently and quickly, especially if your executor lives in another state or county. However, estate planning attorney Randi Newbery says, "While it is true that a Living Trust can replace a Will and thereby avoid probate, it is not necessarily the best estate planning option for New Jerseyans. There are many popular misconceptions about Living Trusts. There are specific situations in which Living Trusts may be well suited to your estate plan, but they do not lessen the tax burden on your estate, nor do they protect your assets from creditors. In New Jersey, probate is no longer the long, expensive, drawn-out process that it used to be, and still is in some other states. Living Trusts are not for everyone. There are many factors to consider in determining whether a Living Trust is right for you. You should consult an attorney who focuses his or her practice on estate planning and administration before you make your decision."

Disclaimer Trusts: For New Jersey Couples Only

Disclaimer Trusts help New Jersey couples save on New Jersey estate taxes. For many years, the State of New Jersey has taxed estates that exceed $675,000. If the entire estate is left to the surviving spouse, he or she has no New Jersey estate tax to pay after the first spouse's passing. However, if the terms of a Disclaimer Trust are not specifically written into each of their wills, the couple misses out on a planning opportunity to save tens of thousands of dollars -- or more -- in taxes. This trust is a valuable estate planning tool that allows surviving New Jersey spouses and their chosen advisors to look at their financial situation after the death of the first spouse. At that point, they can decide whether to fund a Disclaimer Trust. For example, let's say that a married couple together has assets valued at $1,350,000. If they do not have Disclaimer Trusts written into their wills, the potential tax burden on their beneficiaries after the death of the surviving spouse may be increased by more than $50,000. The effect of funding the Disclaimer Trust is to save on New Jersey estate taxes so that more of the money the couple worked so hard for all their lives goes to their beneficiaries, and not to the State of New Jersey.

Credit Shelter Trusts

The Credit Shelter Trust has many names. It is also known as the Bypass Trust, the B Trust, and the Family Trust. Whatever you call it, this trust enables a couple to shelter their available federal unified credit exemption amount through a trust set up in their wills. When the first spouse dies, the Credit Shelter Trust will be funded with their applicable available federal unified credit exemption amount for the year of death. The Bypass Trust is often used to provide income to the surviving spouse and other family members during the survivor's lifetime. If set up properly, the assets in the Bypass Credit Shelter Trust would not be included in the surviving spouse's estate, so they would be distributed essentially "federal estate tax free" to the trust's beneficiaries.

Marital Trusts

Tax laws can and do change. The value of an estate often changes too between the time when the Last Will and Testament is made and the time the estate is administered. However, with proper estate planning, your executor and the trustee(s) will have the flexibility they need to deliver the maximum tax savings to your heirs. There are several kinds of Marital Trusts, but the Qualified Terminable Interest Property (QTIP) Trust is the Marital Trust most couples choose, particularly when there are children by previous marriages. This trust provides income to the surviving spouse during his or her lifetime, and it names the trust's beneficiaries after the surviving spouse dies. Correctly structured, this trust qualifies for the marital deduction and may protect not one, but both, spouse's assets from federal estate taxes in order to pass on the maximum inheritance to the ultimate beneficiaries.

Generation Skipping Trusts

Generation Skipping Trusts pass the contributed assets down to the grantor's grandchildren rather than the children. The grantor's children never take title to the assets, although the children can, if the trust is so designed, receive primary or supplementary income from the trust. Generation Skipping Trusts are primarily designed to eliminate or lessen estate taxes. However, since the children never take title, these trusts have the added benefit of protecting the assets should the grantor's child divorce or become involved in any adverse or contentious legal action. This type of trust, although it does have certain limitations, can help a family to minimize estate taxes for generations.

Grantor Trusts

Another useful estate planning tool is the Grantor Trust, which can produce significant tax advantages. Grantor Trusts may include, for example, Revocable Trusts (also known as Living Trusts), Grantor Retained Annuity Trusts (GRAT), and Qualified Personal Residence Trusts (QPRT). With these trusts, the grantor retains some control over how the trust is administered, including the power to revoke the trust. Another advantage of the Grantor Trust is that it permits the grantor to sell assets to the trust without paying tax on the gains. The grantor also retains control over the property with which the trust was funded. The grantor may not need to file a fiduciary trust income tax return with the IRS; the taxes can usually be paid on his or her own personal income tax return. As the tax laws change, or the grantor's personal circumstances change, it is possible to convert the trust to a Non-Grantor Trust. An experienced estate and tax planning attorney can advise you about the different options and advantages of Grantor Trusts.

Life Insurance Trusts

One of the most popular trusts is the Life Insurance Trust. Working with an experienced estate planning lawyer, you create a trust that owns your life insurance policy or policies. You select a trustee who is required to follow the instructions you set up in the trust. This trust gives you control over how and to whom the money is paid out. In many cases, a Life Insurance Trust helps to reduce or even eliminate New Jersey and federal estate taxes so that more of your estate can go to your loved ones. Since the trust, not you, purchased and owns the policy, it will not be included in your estate. Through it, you can set up a lifetime income for a spouse and keep the proceeds out of your estate. However, if you have existing life insurance policies that you want to transfer to a trust, make sure to ask your attorney about how the three-year rule might affect you. There are many aspects involved in setting up and making sure that your Life Insurance Trust is administered correctly. It is not something that you want to do without the help of an experienced estates lawyer.

Charitable Remainder and Charitable Lead Trusts

Charitable Remainder Trusts (CRTs) often are funded with highly appreciated investments, such as stocks, bonds or other securities, and are effective strategies that can be used to greatly reduce taxes. Charitable Remainder Trusts are split interest trusts; the interest income goes to the non-charitable party, usually the grantor or a beneficiary, while the remainder interest is paid to one or more charitable organizations. The charity or charities you choose must have IRS-approved tax exempt status. The charity serves as the trustee, investing the property to produce income for you for a set period of time or for life. This trust provides an income tax deduction for the grantor. The charity does not have to pay capital gains tax on the appreciated investment, and because the property is already gifted to the charity, it is not taxed as part of the grantor's estate. A winning strategy indeed for all involved! Charitable Lead Trusts (CLTs) are another smart strategy for producing tax savings. In this case, the charity receives the income interest from the trust over a set period of years, or for the life of the grantor. The principal and any remainder interest then reverts back to the donor or to his or her beneficiaries named in the trust. In some cases, these charitable trusts enable the grantor to leave more to the beneficiaries than might be possible with a bequest in his or her will. If you are already making significant gifts to a favorite charity or charities, ask an experienced estate planning attorney whether a Charitable Remainder Trust or a Charitable Lead Trust might be an effective strategy for you.

Is a Trust Right for You?

As this overview suggests, well-designed trusts can produce many advantages, not only for your beneficiaries but also for you during your lifetime. Trusts can help to minimize taxes, court costs, and unnecessary legal fees. In addition to the more popular trusts highlighted here, there are other trusts that may fit your need. You should discuss your goals and the specifics of your situation with an experienced estate planning attorney to learn whether a trust might be an effective part of your estate plan. Randi Newbery cautions against trusting websites to create a trust or a will on your own: "That can turn out to be a costly mistake." Randi suggests you remember that successful estate planning is an ongoing process, and requires an attorney who knows this complex area of the law and is dedicated to helping you achieve your goals. Laws change. Your financial and personal situations can change. To ensure that it will still achieve what you want it to accomplish, your estate plan should be revisited, reviewed and updated as needed during your lifetime. If you have a question about trusts or any other estate planning issue, you can reach Randi Newbery at 973-992-5034.