Executors (or trustees of your revocable living trust) have to make decisions as to which assets of your estate should be transferred to which trusts ("funding"). The planning opportunities, traps and complications are far greater than most executors, trustees and heirs realize. Let's take a look at just some of the questions that can come up in a typical estate of a married couple upon the death of the first spouse. There are likely to be at least two trusts (often many more) to which your will provides for distributions:
A By Pass trust (also called "credit shelter trust") can be funded with up to $2 million in assets to protect the $2 million current federal exclusion (the amount you can bequeath to your heirs, federal estate tax free). This amount is supposed to increase in future years. The assets in the By Pass trust will be available to the surviving spouse, but not taxed in his or her estate. In many instances a lower amount may be transferred to the By Pass trust (if the will or post-mortem planning document permits) to avoid state estate taxes (many states don't follow the federal law and have lower exclusions).
A Qualified Terminal Interest Property Trust ("QTIP") is a document which allows you to leave a marital bequest to your surviving spouse. A Qualified Domestic Trust ("QDOT") will serve the same purpose if the surviving spouse is a non-citizen. There are other options but the key is that this bequest qualifies for a marital deduction to avoid estate tax on this portion of the estate upon the death of the first spouse. Let's now assume that the entire remaining portion of your estate (those assets not held in a By Pass trust) is to be held in a QTIP - Marital trust (trusts provide far more planning flexibility and protection than an outright bequest to the surviving spouse):
If your will specifies that a particular asset should be distributed to a designated trust, then that decision will probably be followed. For example, if you have a family business you want to retain in the family line, you may bequeath it to a QTIP-Business trust with specially selected trustees, principal invasion rights, and eventual distribution to your named heirs. If you include in your will that you bequeath the business to a QTIP Business trust, then that is where it will go under the provisions that you set. You may also include that the rest of your assets may then be divided between a By Pass trust and regular QTIP trust (i.e. a QTIP trust intended to hold all assets other than the business). The more you include in your will, the more control you will have as to where your assets end up. Keep in mind though that other documents may be relevant. For example, if you own stock in a closed corporation, the shareholders' agreement may govern where your stock must be distributed.
When there is a choice as to where the assets will go, the decision as to which assets should be transferred to which trust should be a team approach. The team could include, depending on the asset and issues: your accountant, probate attorney, corporate counsel, pension consultant, investment adviser, and others. There are issues that need to be addressed such as income tax, estate tax, legal, business and other concerns, and each member of your team has a different specialty. Don't expect your probate attorney to be as sharp on income tax issues as your accountant should be, and don't expect your accountant to identify the optimal mix of securities with the same skill as your wealth manager could.
Factors to Consider:
There could be a myriad of other factors to consider. So the best answer is to involve all your professional advisers, and plan the decision carefully.
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