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An Irrevocable Trust Can Help You to Avoid Trying to Divvy Up Your Estate Fairly Among Your Children

Definition of trust“Even though determining how to pass on assets is not always clear cut, many people decide to simply divide assets equally among their heirs. Yet in a number of different situations, ‘equal’ may not be fair.”

Forbes’ article, “Where Inheritance Is Concerned, Equal May Not Always Mean Fair,” asks you to consider a scenario in which you died with two children, a 25-year-old daughter and 16-year-old son. The older daughter is a recent college graduate for whom you paid all of those expenses amounting to  $250,000. At death, you had assets of $1 million. If your estate plan provided that you distribute you estate equally in a trust, then the younger son would have to pay for his college using proceeds from his portion of the Trust.

As a result, after college expenses, the son will be left with $250,000 and the daughter will have $500,000. Although you distributed your assets equally and split the estate right down the middle, you may not think equal is fair.

This same type of inequitable distribution can also happen if you own a home, business or other sizable assets.

One way to avoid the “inequality problem” is to create an irrevocable trust that holds assets that will not be divided equally until—as in the example above—both children have completed college. Another option is to elect to “never” distribute assets by designating a child as the trustee of the trust at a specific age and giving her the authority to make distributions to herself, without inheriting the entire estate and paying estate taxes.

This type of estate planning can be complicated, particularly if you try to create a trust in a vacuum and don’t plan ahead and consider variables and contingencies. It is important to speak with a qualified and experienced estate planning attorney.

An irrevocable trust lets you plan for the specific needs of your family and can provide asset protection. If you don’t have the trust distribute the assets immediately, a son who gets divorced is, in effect, given “divorce protection” from having assets in trust—even where the child is the trustee. In some circumstances, a trust can also provide protection from creditors and litigation.

The important thing is to think about your intentions for your assets generally, such as whether to provide for education, ongoing support or maybe an emergency fund. When you determine your overall intentions, an estate plan can be created to make certain that those intentions are executed, regardless of the unknown events which occur in life.

Reference: Forbes (February 27, 2017) “Where Inheritance Is Concerned, Equal May Not Always Mean Fair”

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Don’t Die Rich? Why?

Stacks of coins"So by adhering to the "Don't Die Rich" theory of planning, how do you put your wealth to work?"

The Wilmington Business Journal says that estate planning should be a serious exercise, together with financial planning. Both are ongoing events, no matter your age or status.

In its article "Do You Really Want To Leave a Large Inheritance?", the Journal advises seniors that having enough retirement funds is critical. But what about this other school of financial planning: Don't Die Rich!

The "Don't Die Rich!" philosophy is based on the premise that money is best used while you are around to enjoy it and appreciate the benefits. Due to lengthening life spans, in many cases, parental assets aren't going to be around to be inherited by children until those children are near retirement age.

So by adhering to the "Don't Die Rich" theory, how do you put your wealth to work?

Consider the following:

You come first, so enjoy yourself. The first beneficiaries of your estate should be you. There's nothing wrong with enjoying your wealth in ways that you can share with your family. Think about spreading the wealth by gifting or making even modest financial transfers to your family heirs. Doing so now, while you are around to see the results, may be better for all concerned instead of leaving them a large inheritance in the future. It's called "gifting with warm hands." Speak with your estate planning attorney about tax implications and strategies.

Charitable giving. Become a philanthropist! There are many pluses to making a major charitable gift during your lifetime, such as tax benefits and the enjoyment of seeing all the good works that your money will give the charity. Talk to your estate planning attorney about the possibility of creating a Charitable Remainder Trust.

By using this trust, you can put money or securities in an Irrevocable Trust for your charity and reserve lifetime income payments for yourself. When you pass away, the income payments stop, and the remaining trust assets are given to your charity. There are a number of other trust-related charitable giving programs, so talk with your estate planning attorney for details.

Of course, the "Don't Die Rich" plan isn't for everybody, but the thought of seeing the benefits of using your money while you are alive does make sense in many cases.

Reference: Wilmington Business Journal (January 15, 2016) "Do You Really Want To Leave A Large Inheritance?"

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Paying the Estate Tax

Bigstock-Dollars-House-3639183One of the biggest headaches for executors of large estates is coming up with the cash to pay the estate tax. If the cash or other liquid assets are not a part of the estate, then other things might have to be sold that the testator would have preferred to have gone to his or her heirs. There is a way to avoid this problem.

Estate law lore is full of stories about things that had to be sold to pay the estate tax. Businesses, art collections, real estate, wine collections and much more have been sold so that money could be made available to pay the estate tax. However, there is a relatively simple way to provide your estate with enough cash to pay the estate tax: life insurance.

This was recently explained in the Wills, Trusts & Estates Prof Blog in "How Life Insurance Can Be Used To Help With Estate Taxes."

You can create an irrevocable trust and make it the beneficiary of a life insurance policy.

When the insurance is paid out, the executor of the estate can use the money to pay any estate taxes owed. It is important that the trust be irrevocable in order for the life insurance proceeds to not be included in the estate and also subject to the estate tax.

For this to work the trust must be created at least three years before you pass away. If not, then it will be considered as part of your estate.

Of course, life insurance is not the only way to provide liquid assets that can be used to pay estate taxes. Before rushing to create an irrevocable trust and buying a life insurance policy, talk to an estate planning attorney about your other options.

For more information about estate planning, please visit my estate planning website.

Reference: Wills, Trusts & Estates Prof Blog (October 15, 2015) "How Life Insurance Can Be Used To Help With Estate Taxes."

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