In general, the primary beneficiary has all the rights, benefits and control over the trust property that a person would have with outright ownership – in addition to tax, creditor and divorce protection not available with outright ownership.
Estate planners use trusts to protect beneficiaries from their inability, their disability, their creditors and their predators. Included under “creditors” are the IRS and divorced spouses. More sophisticated estate planners generally create multi-generational dynasty trusts for their clients’ descendants that are (1) estate tax protected, (2) creditor protected and (3) divorce protected – while at the same time allowing the primary beneficiary to control the trust as the trustee.
These trusts are sometimes referred to as “beneficiary-controlled” trusts. Following are the design features of the typical beneficiary-controlled trust:
The beneficiary-controlled trust is gaining popularity among estate planners. Beneficiary-controlled trusts can be created at death as part of the grantor’s living trust, or can be used in irrevocable trusts, including irrevocable life insurance trusts. In addition, trusts created during the grantor’s lifetime can be designed as so-called “grantor” trusts. With such trusts, the grantor is responsible for paying the trust’s income taxes. Thus, the trust grows income “tax free”. In essence, the grantor’s payment of the trust’s income taxes is a tax-free gift to the beneficiaries of the trust. In short, a beneficiary-controlled trust should be considered whenever it is worthwhile to protect beneficiaries from creditors, divorcing spouses and estate taxes.
THIS ARTICLE MAY NOT BE USED FOR PENALTY PROTECTION. THE MATERIAL IS BASED UPON GENERAL TAX RULES AND FOR INFORMATION PURPOSES ONLY. IT IS NOT INTENDED AS LEGAL OR TAX ADVICE AND TAXPAYERS SHOULD CONSULT THEIR OWN LEGAL AND TAX ADVISORS AS TO THEIR SPECIFIC SITUATION.
The New Portability and Disclaimer Trusts
The Tax Relief Act of 2010 provides for a $5 million exemption (indexed for inflation in 2012) per person from federal estate and gift taxes, and a top tax rate of 35%. In addition, the unused portion of the estate tax exemption of the first spouse to die may be transferred to the surviving spouse (so-called “portability”).What's the Best Way to Pay a Business Owner's Estate Taxes?
A critical element to business succession planning is making certain the business owner’s estate will have the cash to pay estate taxes without having to sell the business. This article will examine the advantages and disadvantages of four such commonly used techniques – IRC Section 6166, IRC Section 303, Graegin loans, and life insurance.Using Life Insurance in Business Succession Planning
This article summarizes the many ways that life insurance can be used in a family business succession plan, and the advantages of using life insurance.