Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, July 10, 1995 TAG: 9507100034
SECTION: MONEY PAGE: A-8 EDITION: METRO
SOURCE: MAG POFF STAFF WRITER
DATELINE: LENGTH: Long
The term trust is confusing because there are so many different types. And the most common has no estate tax ramifications, said J. Lee Osborne, a lawyer who specializes in wills and estates for the Roanoke law firm of Carter, Brown & Osborne.
He defined a trust as ``any arrangement to give control of property to a third party to benefit another person.'' But, if you wish, you can be the donor, the trustee in control and/or the beneficiary. It is, Osborne said, ``a kind of fictional arrangement.''
The great distinction between trusts is their permanency. Revocable trusts are a way of protecting and managing a person's assets, while irrevocable trusts are used to give away funds in order to reduce estate taxes. Both are highly technical and require the services of a lawyer who is experienced in wills and estates.
Revocable, or living trusts, are designed for people who don't want to give up control of their money, Osborne said. They want to keep their wealth as long as they live, have the funds used for their benefit if they become disabled and then give the money to pre-determined heirs after they die.
But a trust is no substitute for a will. Osborne said you need both because some assets will always fall outside the trust.
As the name implies, a revocable trust, like a will, can be changed as long as you live. Osborne said people like this aspect of wills and living trusts because their circumstances can change.
Osborne cited four major reasons for having a revocable or living trust:
The primary reason is that a trust is a management vehicle, a tool for managing assets while you live.
It appeals especially to older people who fear disability or mental incapacity. You can manage the assets while you are able, but another trustee can take over when you are unable to handle your own affairs.
A revocable trust is superior to handing a power of attorney to a relative or friend, Osborne said. That's because the person holding the power of attorney has no duty to act; if he does act, the attorney has broad and unspecified powers.
By contrast, the trustee of a living trust is clearly required to perform specific functions. And the trust can spell out the terms of the actions that the trustee must take. A trust increases accountability.
The trustee does not have to pay some fees and file some reports that are demanded of an executor under a will. But Osborne pointed out this can cut both ways. Some people see the reports as a nuisance and inconvenience for the person handling the funds; yet they are, on the other hand, a safeguard to see that the duties of the executor are carried out. The probate court provides the means for treating all heirs fairly.
If you decide on a revocable trust, therefore, you must take care in your selection of the trustee who will act after your death.
A trust offers privacy. Unlike wills, trust documents are not public records.
Least important, the assets in a trust do not have to go through probate. You can even have your life insurance paid into the trust.
In Virginia, there is no reason to fear probate, however. Osborne said the fees are low and the procedures in this state have been simplified.
Osborne pointed out, however, that there is a difference between a probate estate and a taxable estate. Even though the money inside a revocable trust avoids probate, the government will count the money for estate tax purposes.
An irrevocable trust, as the name suggests, cannot be changed after it has been created. The various types of irrevocable trusts are designed for people who have larger estates and want to avoid some of the tax bite. To accomplish this, they are willing to give away some of their money while living.
Such trusts are necessary because every person has the right to an exemption from taxation on $600,000 in gifts (in excess of $10,000 a year per recipient) and estate assets. But husbands and wives can leave each other their full estates tax-free.
Husbands and wives usually leave their estates to each other, but if their assets total more than $600,000, such a course would result in heavy taxation after the death of the second spouse. The objective of an irrevocable trust is to claim the exemption for the estates of both spouses, as they have a right to do.
Osborne said it is possible to use life insurance with an irrevocable trust to pay heavy taxes on an estate that may not be fluid. That may involve a valuable family business, for instance.
People who set up an irrevocable trust are giving their money away, Osborne said, but it involves ``controlled giving.''
There are many types of irrevocable trusts, but Osborne said one popular form is the Qualified Terminable Interest Property Trust, or Q-Tip. This allows the surviving spouse to receive all trust income, which must be distributed at least once a year, and in some cases, access to the principal as well. When the spouse dies, the assets go to whomever you specify in the trust documents. The trust assets are then taxed as part of the surviving spouse's estate.
Such trusts also ensure that the money stays in the family because the assets could otherwise be threatened if the surviving spouse remarries. Money set aside in a trust prevents such claims by a subsequent spouse.
Osborne said the Q-Tip trust can be set up so that the estate reverts to the grantor if he or she is the survivor.
Some of the other alternatives are the credit-shelter trust, disclaimer trust and marital deduction trust. They suit couples who are in various financial situations. Some people also set up testamentary trusts, which are provided for in a will and do not come into being until after death.
Osborne said couples who are not rich enough to be subject to estate taxes may need trusts for other reasons. One example is providing care for minor children or aged parents. Another is a person who cannot manage his or her own assets, perhaps because of a disability or a spendthrift nature.
But Osborne warned that a trust, while an excellent vehicle for holding assets, is not a good shelter for income.
An individual doesn't hit the 39 percent tax bracket until he or she reaches income of more than $250,000 a year, Osborne said, while a trust reached that bracket last year at a mere $7,650. "It discourages the use of a trust as a way to hold and accumulate income," Osborne said.
by CNB