Cynthia Leach

Accountant & Estate Planner

A trust established during your lifetime can be used with respect to estate planning for certain types of assets. Insurance proceeds and employee benefit plans, if made payable to the inter vivos trust, would be collected by the trustee immediately following your death without the potential delay and administrative difficulty that may be associated with a trust established under your will. In some states, this approach has the added benefit of avoiding the continuing probate court jurisdiction sometimes imposed on trusts established under wills.

In fact, it may be beneficial to place title to certain assets in an inter vivos trust, as well as to designate yourself as trustee during your lifetime to avoid the probate process. Such an arrangement is often referred to as a self-declaration of trust or living trust (discussed below) and can be effective in minimizing probate time and expenses without incurring unnecessary trustee's fees.

In any case, since a very substantial portion of your total assets is likely to be controlled by contractual arrangements, you should consider designating your trust as the beneficiary of insurance proceeds to give effect to the trust plan. If your spouse is designated as beneficiary, the property management and eventual estate tax benefits may not be achieved for those assets.

Naming a trust as beneficiary of qualified employee benefit plans involves complex estate and income tax rules. An individual should not automatically make his or her pension and profit-sharing plan payable to a trust, even though from an administrative standpoint this may be the most convenient choice. Current federal income tax rules could create some significant problems if the trustee of a revocable trust is also the beneficiary of your qualified plans. In such a case, if an employee dies before the distributions have begun, the entire interest may be required to be distributed within five years from the date of death. In contrast, if the spouse is named directly as the beneficiary, distributions can be paid over the life expectancy of the spouse, and distributions are not required to begin until the employee would have attained age 70½. Further, if your spouse is the beneficiary of a qualified retirement plan -- for example, a 401(k) plan -- he or she may elect to roll over the benefits into his or her own IRA and defer any tax consequences. The timing of distributions and the tax consequences of qualified employee benefit plans are extremely complex. We encourage you to speak with your tax adviser for assistance with this topic.

It may be beneficial to transfer the ownership of certain assets into a living trust. With such an arrangement, you can continue to manage the trust assets as trustee during your lifetime. You can also reserve the right to alter, amend, or terminate the trust at any time.

One of the primary reasons for establishing a living trust is to avoid the probate process and potentially reduce or eliminate some of its negative features -- expenses, delays, publicity, and the formalities of a court proceeding. However, a living trust can also serve as an effective planning device during your life. If at some time you are no longer willing or able to manage your financial affairs, the successor trustee you have designated can step in without any unnecessary delay, expense, or court proceedings.

Although the terms of a living trust permit maximum flexibility, you must observe the formalities of the trust's ownership of assets and, in some cases, file tax returns for the trust in addition to your personal returns. The trust may also incur trustee's fees. Over long time periods, these requirements can become burdensome. Consequently, living trusts that are funded with some or all of your assets may be most appropriate in your later years.

Selecting a Trustee

In creating a trust, you should pay particular attention to the choice of trustee -- the individual or institution that will be responsible for the management, investment, and distribution of funds. The level of competence of an individual selected in such a fiduciary capacity will vary depending on such factors as experience and business judgment. Maybe more important is the fact that, while a corporate trustee's existence is perpetual, an individual trustee may die or become incapacitated, thereby negating the advantage of continuity of trust administration. If you want to name an individual as trustee, you should consider naming a corporate trustee as a successor or backup if the individual cannot or will not serve.

A corporate trustee can provide management and recordkeeping expertise for almost any type of asset and is trained in the responsibilities of being a fiduciary. In addition, the corporate trustee's existence is generally enduring; it will be there long into the future to respond to the needs of beneficiaries. There are fees associated with the selection and use of a corporate trustee. The cost of professional expertise should be weighed in each situation.

You may want to consider naming both a professional and an individual as co-trustees. In this way, you can obtain professional management's expertise coupled with the individual's knowledge of the family and awareness of the needs of individual beneficiaries.

One of the advantages of a trust is its flexibility to adapt to changing circumstances. While a trust is generally irrevocable following the death of the individual who created it, a provision can be included that gives the beneficiary the ability to replace the trustee. This authority can be granted to any individual but is typically reserved for an adult beneficiary, such as the surviving spouse. In other instances, it can be exercised by a majority of the beneficiaries. In any event, a successor trustee may be appointed on the basis of any of several considerations, including the geographic relocation of the beneficiary and the dissatisfaction with the current trustee.

Disclaimer: This guide is not intended to be a substitute for specific individual tax, legal, or investment planning advice, as certain of the described considerations will not be the same for every taxpayer or investor. Accordingly, where specific advice is necessary or appropriate, consultation with a competent professional adviser is strongly recommended.