Financial Matters Mari Ishii

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A trust helps you control how your assets are distributed

Do you want to leave assets for your spouse, your kids, your grandkids or others? Planning for asset distribution can seem a daunting task with the numerous options available. Trusts are a popular planning vehicle -- versatile but binding. Here are some options for you to consider:

» Marital trust: A marital trust is used to benefit a surviving spouse.

This trust is useful for spouses with significantly varying net worth to make use of the unified credit. The trust is funded with enough assets to ensure that upon the death of the first spouse, no estate taxes will be due. The remainder of the estate, which would be equal to the estate-tax exemption amount, is used to fund a credit shelter or bypass trust (discussed next).

» Bypass trust: Bypass trusts are often used with marital trusts at the time of a first spouses' death to primarily benefit the children.

Funds can be made available, either from income or principal, for the surviving spouse's use during his or her lifetime. This two-trust arrangement takes advantage of the full estate-tax exemption amount of the first spouse to die.

If you already have a bypass trust estate plan in place and it is more than three years old, it should be reviewed to make sure it is still accomplishing your planning goals due to the increasing estate tax exemption.

» Irrevocable life insurance trust: An irrevocable life insurance trust (ILIT) can be set up to keep life insurance proceeds from being included in the estate.

This trust owns one or more life insurance policies on a person's life and manages and distributes the proceeds according to the insured's desires.

The benefit of an ILIT is that it keeps insurance proceeds, which would otherwise be subject to estate tax, out of a decedent's estate. The insured, however, is not able to retain any powers over the policy, such as the right to change beneficiaries, and is not allowed to serve as a trustee of their own ILIT.

In addition, this trust can be designed to provide a loan to a decedent's estate for liquidity purposes, such as paying for estate income taxes.

» Charitable remainder trust: Charitable remainder trusts (CRT) may be appropriate for individuals who wish to donate property to a charity and would like to receive (or would like someone else to receive) an income stream for a period of years or over their expected lifetime.

At the end of the trust term, the remaining assets are transferred to the previously determined charity.

Property placed in a trust is excluded from a donor's estate and deduction equal to the present value of the amount transferred can be taken on the donor's current income tax return.

To qualify, the value of the charity's remainder interest must be at least 10 percent of the total value of the asset's initial net fair market value at the time it is contributed to the trust. Because the CRT is a tax-exempt entity, it can sell the property without having to pay tax on the gain and then invest the proceeds in income-producing property.

With the numerous options trusts provide, they can be a good choice in planning for accumulated asset distribution and minimizing taxes. Trusts can be a way for an individual to control how their assets are distributed to meet their goals.