Question: What is a Bypass Trust?
Answer: A Bypass Trust is a trust into which a decedent’s estate passes so that the surviving heirs get a life estate in the trust rather than the property itself in order to avoid estate taxes on an estate larger than the tax credit sheltered amount under the Unified Estate-and-Gift Tax Act under Tax Credit.
Question: How much is exempt under the Tax Credit section?
Answer: This amount changes from year to year. A Bypass Trust is also known as a Life Estate or A-B Trust and is a way for couples of combined estates of more than $1 million to be exempt from estate tax if one or the other dies.
A Bypass Trust is designed to allow the $1 million tax exemption to be used by each spouse. Through a Bypass Trust, the surviving spouse can receive any portion of the decedent’s estate free of estate taxes. The surviving spouse never legally owns the property within the Trust because it’s legally owned by the Trust itself. The spouse can use the assets and property within the estate with certain restrictions. However, when the surviving spouse dies, if the estate is worth more than $1 million, a significant amount of estate taxes will be due before the beneficiaries can receive their inheritance.
Question: When should a person consider preparing a Revocable Living Trust instead of a Will?
Answer: If a single person has an estate worth more than $2 million (2002 and 2003), they may be better off with a Revocable Living Trust for the following reasons:
They save a great deal of money. Probate costs and fees can get quite costly, leaving their heirs with much less of your estate than what they intend to give.
In some states, probate fees are based on the estate’s appraised value rather than the actual amount of equity in the estate. In other states, probate fees are based on the amount of work reasonably performed by a probate attorney. With a trust, no executor is necessary because the same work done can be done by the Successor Trustee (usually a family member). Additionally, because the assets are owned by the Trust, they are not subject to probate administration, so you don’t have to pay the probate administration fees out of your estate.
Because Revocable Living Trusts can be quite complicated, it is in the person’s best interest to seek legal counsel to assure that their plan goes as smoothly as possible.
Question: What is a Revocable Living Trust?
Answer: A revocable living trust is an arrangement made for management and distribution of your property. Like a will, the trust is “revocable,” meaning that you can modify or eliminate it at any time.
These trusts are established by a written agreement or declaration that appoints a “trustee” to administer the property with detailed instructions on how the property is to be managed and eventually distributed. The trust may substitute for probate (court administration of property after death) or for guardianship (court administration after incapacity), if the trustee has detailed instructions about how to handle these situations. A revocable living trust agreement or declaration is usually longer and more complicated than a will, and transfers of assets to the trustee can be time-consuming and expensive.
Question: What is a Spendthrift Trust?
Answer: A Spendthrift Trust or a Spendthrift Provision in a Trust Deed prohibits the beneficiary’s interests from being assigned and hence protects the beneficiaries from creditors.
Most of the assets in the Trust will be safe from banks or creditors. However, creditors can still collect any money paid directly to the beneficiary from the Trust. If an individual thinks that his beneficiary could have problems with creditors, he can give the Trustee broad control over the Trust. The Trustee may be instructed by the Trust to withhold income and/or principal from the beneficiary.
For maximum effectiveness, a Spendthrift Trust should be irrevocable. It must also give the Trustee full discretion over the assets of the Trust, so the Trustee will have full power in deciding when and how much money should be given to the beneficiary.
Question: What is a Totten Trust?
Answer: A Totten Trust is a revocable trust created by one’s deposit of money in one’s own name as a Trustee for another. A Totten Trust is commonly used to indicate a success of to the account without having to create a will.
Setting up a Totten Trust is as simple someone going to a bank and opening a Trust account by himself. A Totten Trust is best for amounts of about $20,000 or less. Larger amounts could present problems in payment of estate taxes at the depositors’ death, since the assets in these accounts are added to his taxable estate. A Totten Trust can be paid out quickly after death with a minimum of formalities. Because the money transfers directly, there is no need to choose a third-party Trustee. As with any other Trust, a Totten Trust keeps assets out of probate. A Totten Trust can be revoked at any time during the grantor’s lifetime, and the beneficiary cannot withdraw the money from the Trust account until the grantor’s death.
Question: What is a Testamentary Trust?
Answer: A Testamentary Trust is a Trust that is created by a will and takes effect when the settlor (testator) dies.
Unlike a Living Trust (made while a person lives), a Testamentary Trust is established through a Will upon a person’s death to handle his minor children’s financial affairs. This eases the necessity of having to set up a guardianship of the estate, with all of the concurrent court filings, accountings and supervision.
The Executor is given full discretion to decide if the Trust is beneficial to the children, and whether the trust should be established. If anyone currently has minor children, or is considering having children, inclusion of this provision gives an Executor the greatest flexibility in handling the children’s estate if neither parent is alive while the children are still minors.
Normally, the person or one of the people named as guardian of the minor children will also be named the Trustee of the Trust. However, in some circumstances it may be advantageous to have different people fulfill these roles.
Question: What is the difference between a Revocable Trust and an Irrevocable Trust?
Answer: A Revocable Trust is where the Grantor can change the terms of the Trust or even revoke the Trust altogether and take back all of the assets in the Trust. An Irrevocable Trust is where the terms of the Trust cannot be changed (i.e., the beneficiary cannot be changed), and that whatever assets are placed in that Trust cannot be withdrawn by the Trustee.
