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Simple Will vs Disclaimer Trust Will vs A-B Trusts Part 2

By admin

Trust and Tax Savings Plan:

 

            The Trust and Tax Savings Plan utilized trusts, set up at the time of the execution of the will and other documents, to save on estate taxes by utilizing both spouses applicable exclusion amount.  Several variations of this plan are available for a variety of situations.  The most common types of trust plans are the ?A/B? and ?A/B with QTIP? trust.  The difference between these two is who gets to control where the assets pass after the second spouse dies.

The first and most common variation is the ?A/B? trust set up.  In this variation it is easiest to describe the workings of the ?B? trust first.  The ?B? trust is funded up to the full applicable exclusion amount.  This trust will be used to support the surviving spouse during his or her lifetime and the surviving spouse will have the power to determine where any remaining assets of the ?B? trust will pass upon the death of the surviving spouse.  The surviving spouse usually has the power to withdraw 5% or $5,000.00 of the principle of the trust each year.  This trust will generally escape taxation when assets are passed on to the next generation after the death of the second spouse. 

The ?A? trust will be funded with everything that is left over after the ?B? trust is funded with the maximum applicable exclusion amount.  The ?A? trust is controlled by the surviving spouse and it is used to support the surviving spouse during his or her life time.  The surviving spouse has the power to determine where any remaining assets will pass after his or her death.

The second common variation is an ?A/B QTIP? trust.  QTIP stands for ?Qualified Terminable Interest Property.?  The QTIP trust is a fancy way of saying that the first spouse to pass away will have control over where the remaining assets of the A trust will go after the death of the surviving spouse.  The surviving spouse will still receive the benefit of the income of the ?A? trust but he or she will not have control over where the property ends up upon his or her death, the first spouse to pass away has already determined its outcome.

 

 

Pros:

• Parents have tax savings clauses available to them
• Life Insurance and retirement beneficiaries are changed to trusts
• The children?s inheritance is protected from the possibility that they are too young or financially immature to handle their inheritance
• The trusts are revocable trusts and can be changed at anytime
• Parents choose who will be the guardians of their children
• Parents pick their personal representative

 

Cons:

• Costs significantly more than simple will plan
• Trusts must  be set up now
• The ownership of major assets need to be changed shortly after the execution of the will documents
• Clients must remember to title any newly acquired assets in the name of the trust

 

Recommended for:

• Clients with a combined net worth of $5 million and up
• Clients who would like to have the opportunity to save on estate taxes
• Clients with young children or those they do not believe are old enough to properly manage the assets they may receive
• Clients with second marriages that want to ensure that property is passed on to particular family members outside of the control of the surviving spouse

 

 

Transfer on Death Deed (TODD)

 

            The Transfer on Death Deed ?TODD? is a recent development within Minnesota Law.  As of August 1^st 2008 the Minnesota legislature has authorized the use of TODDs as a way to pass on real property.  The TODD is a deed that is filled out and recorded in the recorder?s or registrar?s office and upon the death of the person or persons that own real property that property will pass outside the probate process to whomever is listed on the TODD.  The property passes to the person named on the document with all mortgages, liens and encumbrances still intact. 

What this means is that if a husband and wife wanted to pass on their home to their child after they die they could fill out a TODD and have it recorded.  When the last spouse passes away the child would go to the recorders or registrars office with a certified copy of the death certificate and then the property would be legally transferred to that child.  The property can be passed to multiple people at once.  For example, if a husband and wife had 3 children the property could be passed in equal shares to the 3 children.

The TODD will keep the home out of the probate process and transfer the home in a much shorter amount of time than had it gone through the probate process.  Keep in mind that mortgages and liens will still be attached to the home.  If the children cannot pay the mortgage the home will likely have to be sold.  In that case the children, having equal ownership, would split the profit from the sale of the home. 

           

 

Full post as published by Minnesota Estate Planning Blog on August 03, 2008 (boomark / email).