FAQ's

The following discussion is intended to provide some helpful, basic background as to SOME of the legal and tax issues involved in areas practiced by the firm. It does not constitute legal advice, and you should not rely upon it as such. Rather, you should seek individual advice, due to the complex nature of the laws in this area and the individual nature of each person's situation. However, we hope you find this helpful as some background and explanation.

Why do I need a Will?

A Will is a document which determines how assets will be distributed at your death. Without a Will state law determines how assets will be distributed at your death. (See "What is Intestacy?")

A Will also determines who will act as your "Personal Representative", also referred to as an executor. The Personal Representative is the person in charge of your estate, who notifies creditors, pays your bills and debts, collects assets, and distributes them as set forth under your Will.

For parents of minor children, one of the most important reasons to have a Will is to nominate who you wish to act as the guardian of your children in the event of your death.

What is Intestacy?

Intestacy is what happens when you die without a valid Will. The proceedings are generally similar to probate, except that state law, not your own wishes, determine who will act on your behalf, and who will receive your property.

What is a Living Will?

A Living Will is a medical document expressing your wishes as to medical treatment in situations when you can not make your own decisions. For instance, most Living Wills typically provide that if you are in an irreversible and terminally unconscious state you do not want your life artificially prolonged. A Living Will is also usually combined, or accompanied with, a Medical Power of Attorney, giving the person you name the right to act on your behalf in implementing your wishes on these issues.

What is a Power of Attorney?

A Power of Attorney is a grant of authority to another individual to act on your behalf. A General Power of Attorney gives another person, such as your spouse, child, or a trusted friend, the power to act on your behalf for almost all financial matters. For instance, if you were incapacitated, this would give someone else the power to pay your bills, deposit your checks, etc. If an individual does not have a Living Trust, a General Power of Attorney would be the main means of managing assets in the event of incapacity, absent the need for a court appointed Conservator. If an individual does have a Living Trust, that would be the main vehicle for managing assets in the event of incapacity, but a General Power is still usable to transfer assets to the trust, if necessary, and handle matters outside the purview of the Trustee, such as dealing with the IRS.

What is a Trust and Why would I need one?

In the most general terms, a Trust is an arrangement with a Trustee (which can be one or more individuals or corporations) holding assets for the benefit of one or more beneficiaries, managing, controlling, and distributing those assets under the powers, discretions, and specific terms of the document establishing the arrangement.

There are many advantages which can be obtained through the use of Trusts, some or all of which may be relevant to your situation. Trusts can protect the assets of beneficiaries, reduce estate taxes, simplify administration, and protect privacy.

As you will see from the further questions, there are a great variety of Trusts. Trusts can be revocable and established during your lifetime ("Living Trusts"); trusts can be established under your Will at your death ( "Testamentary Trusts"); and there are trusts which are established during your lifetime, principally for tax purposes, which you do not have any power to change ("Irrevocable Trusts"). There can be a variety of specialized trusts created in most of these manners, such as a Credit Shelter Trust, Marital Trust, or Generation Skipping Trust.

What is a Living Trust?

A "Living Trust", or "Revocable Trust" is a trust which you establish during your lifetime (unlike a Testamentary Trust, which is provided for in your Will). Unlike an Irrevocable Trust, however, you retain complete control over a Living Trust during your lifetime, with the power to utilize assets or change the document however you wish.

A Living Trust represents the primary estate planning document for many individuals. A Trust Agreement is signed to create this arrangement, which can be used to manage one's assets for your benefit, then for the benefit of your spouse and children.

What are the Advantages of a Living Trust?

A Living Trust offers two primary advantages from a Will, because either method can be used to create Credit Shelter, Marital, and Generation Skipping Trusts. The first advantage is that since the Living Trust is established during your lifetime, it allows for management of your assets in the event of incapacity. Most individuals name themselves as the initial Trustees of their own trusts, but also name in the Trust Agreement who they wish to act as Trustee when they cannot act. In the event of incapacity, this successor Trustee would manage the assets in the trust as provided in the document, typically making payments and managing assets for your benefit and maintenance. This can avoid the need for a court proceeding to appoint a Conservator to fill this same role.

The other advantage of a Living Trust is that, assuming enough of your assets are transferred into the Trust prior to death, it avoids probate. Probate is the court proceeding to file a Will and appoint a Personal Representative. The Probate procedure has certain deadlines and time periods to wait before completing an estate, and incurs additional legal costs. Additionally, any Will filed in probate becomes a matter of public, record, while a Living Trust does not.

What is a Testamentary Trust?

A Testamentary Trust is a Trust arrangement which is provided for in your Will, which does not become effective until your death. The Will will usually be subject to probate, and all the Trust provisions therein become a matter of public record that anyone can examine. It also does not provide for any management of assets during your lifetime. Other than these limitations, a Testamentary Trust can provide for the same benefits available to Trusts created under a Living Trust agreement.

What is involved in Funding a Living Trust?

After creating a Living Trust, the next step is to fund it. This means transferring title of assets to the Trust.

For instance, after creating a Living Trust for a couple with a home, a brokerage account, and a life insurance policy, we would prepare a deed to transfer the home into the Living Trust, and assist the clients to transfer the brokerage account and the life insurance into the name of the Living Trust. This is usually necessary to avoid probate. The time and effort necessary to fund a Living Trust thus can vary greatly depending on the nature and extent of your assets.

What is a Credit Shelter or Bypass Trust?

A Credit Shelter or Bypass Trust, also referred to as a "Decedent's Trust", or "Trust B" (you will hear the term A-B Trust to describe this arrangement), is a means of using a Trust arrangement for a married couple to reduce estate taxes upon the surviving spouse's death, by establishing this separate trust at the first spouse's death.

When a married couple knows or anticipates that their combined assets may exceed the exempt amount on the survivor's death, establishing a Credit Shelter Trust should be considered.

What is a Marital Trust or a QTIP?

A Marital Trust or a QTIP ("Qualified Terminable Interest Property") Trust is a Trust arrangement which qualifies for the Estate Tax Marital Deduction, but rather than distributing assets outright to a surviving spouse, it holds the assets in a trust providing the spouse with at least the income for his or her lifetime, and which can benefit no other person during the spouse's lifetime. However, at the spouse's death, the trust is distributed as the first spouse to die set forth.

There is a deduction from the estate tax for all assets passing to a spouse. These assets can pass outright, or in certain specifically limited trust arrangements. The Marital QTIP Trust is the most popular arrangement, and requires all income be paid to the surviving spouse, but allows the original transferor to set forth in the agreement how it is distributed when the spouse dies.

The basic concept of the Marital QTIP is to provide for a spouse while protecting the original transferor's assets. For instance, a husband who had been married previously might establish such a trust under his Living Trust Agreement for his new wife. The trust could be set up with a bank or other corporate trustee, paying the wife all income during her lifetime, and any other amounts for which the husband gives the Trustee discretion. Upon the wife's death, however, the trust would pass to the husband's children from his prior marriage, so that he could be assured that his wife was provided for, but that his children were protected as well.

There are some other technical reasons to create a Marital Trust, one of which is to allow maximum use of Generation Skipping Transfer Tax Exemption, if Generation Skipping Trusts are to be created.

What is Continuing Trust?

A continuing Trust for a beneficiary represents any situation where you wish to delay outright distribution of an asset. For instance, if you have minor children, then you may wish to provide that if something happened to you, they will not receive their inheritance outright until age 25 or 30, and that until that time it will be held in a trust for their benefit, with the Trustee paying any necessary or appropriate expenses, but not allowing the children to waste or dissipate the money.

Sometimes parents have concerns about specific children and their patterns of behavior, such as drug use or a wasteful nature, and wish to benefit the children without allowing them free access to do whatever they want with the money. Similarly, parents or grandparents may have concerns about minor children and the effect a substantial inheritance can have on their work ethic and motivation. Alternately, you may wish to limit certain amounts set aside for children, grandchildren, or other beneficiaries to specific purposes, such as education.

Continuing Trusts can be set up under your Living Trust Agreement, and often use a third party Trustee, such as a trusted family friend, or corporate Trustee, to act as Trustee for the beneficiaries. You can establish these trusts however you see fit, with whatever provisions you feel are appropriate. These range from a simple trust provision to delay outright distribution to a minor until he or she reaches age 25, or they might be a trust for grandchildren established only to pay for their education. On the other hand, you could have very elaborate incentive trusts, whereby children or grandchildren only receive distributions to the extent they are working productively for themselves or society, and/or to the extent they are not abusing drugs or alcohol. These Trusts can terminate at specific points, or they can continue for the beneficiaries' lifetimes.

What is a Generation Skipping Trust?

A Generation Skipping Trust is a Continuing Trust established for a child or other beneficiary which is intended to last for the beneficiary's lifetime. Such a Trust would typically be established under an individual's or couple's Living Trust agreement.

It should be noted that there is some confusing terminology as to Generation Skipping Trusts, or GST's. The "Skipping" does not mean that the child for whom the trust is held does not benefit from the Trust. It is possible to give a child almost complete control and benefit from such a trust, but rather, the Skipping refers to the fact that the Trust will not be subject to estate tax at the child's death.

As discussed above, there are various reasons for establishing a Continuing Trust, which could include a trust lasting the beneficiary's entire lifetime, to protect the beneficiary from himself or herself, and to reserve assets for specific use. However, even where parents feel completely comfortable with their children receiving their inheritance outright, the Generation Skipping Trust offers advantages to the children and their descendants.

For instance, a Generation Skipping Trust could be established for the benefit of a couple's child, rather than outright distribution. The child could act as her own Trustee, manage the trust assets, and distribute to herself whatever assets she felt was necessary. At her death, the assets could be distributed as she set forth in her Will. Effectively, she has almost as much control as she would have had she received the assets outright.

The advantages are that these assets would not be taxed in the child's estate at her death, because of the trust arrangement. The basic rationale is similar to that of a Credit Shelter Trust.

This savings can be very significant. For instance, let's assume a similar estate taxation system is still with us in the future, and that a child would have her own taxable estate at her death based on her own assets.

The arrangement also aids in keeping the child's inheritance separate from her husband, so that it will not be commingled, and possibly subject to division in the event of divorce. It may also offer protection from creditors.

The flexibility of such an arrangement is such that if a child does very well on her own, establishing this separate trust can save a great deal of estate taxes, as indicated above, and yet if a child has greater need of the assets, he or she can use as much as needed during lifetime.

What is an Irrevocable Trust?

An Irrevocable Trust is normally referring to a Trust established during your lifetime, principally for estate tax purposes, which you give up all or almost all control over. Because of the nature of the estate tax, one of the ways to reduce it is to make certain gifts during lifetime which will exclude assets from taxation at death, but to do so, you must not only give up the assets but most rights to direct or control them. Typically, an Irrevocable Trust represents an advanced estate planning technique to consider when estate taxes still appear to be an issue after establishing a Credit Shelter arrangement. Technically, after the transferor dies, many of the other arrangements discussed above, such as a Credit Shelter Trust, Marital Trust, or Generation Skipping Trust, also become Irrevocable Trusts at that time.

Common Irrevocable Trusts include an Irrevocable Life Insurance Trust (ILIT), a Qualified Personal Residence Trust (QPRT), and a Charitable Remainder Trust (CRT).

What is an Irrevocable Life Insurance Trust or ILIT?

An Irrevocable Life Insurance Trust is a separate Irrevocable Trust established to hold life insurance in such fashion that it will not be subject to estate taxation on the death of the insured. When an individual faces a taxable estate, transferring any substantial policies into such a trust can save a great deal of estate taxes. Additionally, if an individual's estate is comprised of non-liquid assets, establishing such a trust and purchasing life insurance provides a means of paying the estate taxes without forcing sale of the illiquid assets.

What is the estate and gift tax?

The estate and gift tax is a system of taxing the transfer of assets from an individual, whether during lifetime or at death.

The estate tax is imposed on all assets owned by an individual at the time of his or her death, and include not only those assets owned outright, but those held in almost any form of ownership in which the individual has any control, interest, or benefit.

Given the changes in estate taxation anticipated in the next few years, planning to reduce estate taxes can be somewhat complex, but it is still an important way to ensure your family and chosen beneficiaries receive their inheritance in a tax-efficient manner.

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