Estate Planning Part Three

December 31, 2008

Wills may contain provisions for creating a trust upon a person’s death. A trust created after death is called a Testa-mentary Trust. The Decedent, or person who died, leaves instructions in his or her will for the Executor, generally a friend or family member, to transfer the necessary assets. When the trust is established, a Trustee, which is generally a bank, is responsible for the distribution of the assets to the heirs as outlined in the will. The Trustee is considered to be a Fiduciary, a person with a legal duty to act in the best interest of another.

A trust beneficiary is the person who will receive either income or principal from the trust. The assets of the trust are not the property of the beneficiary and cannot be used as collateral or be seized by creditors. Assets distributed from the trust belong to the beneficiary. A trust can have two types of beneficiaries:

Income Beneficiary: the person who has the right to receive income from the trust or the right to use the trust assets as outlined in the decedent’s will.

Remainder Beneficiary: the person who has the right to the assets after the death of the income beneficiary.

In some instances the Income and Remainder Beneficiary is the same person. But if there are multiple beneficiaries, the trustee has the task of acting in the best interest of every party.

FOUR SITUATIONS THAT ESTABLISH TESTAMENTARY TRUSTS

1. A husband establishes a trust for his second wife as Income Beneficiary and the children from his prior marriage are named Remainder Beneficiaries. This arrangement ensures an income to the second wife during her lifetime; the remainder (if any) will go to his children.

2. A married couple may establish a trust for each of their children as Income and Remainder Beneficiaries. In each trust
the parents have the ability to specify when distributions will be made and the amount. This could be beneficial if the child is:
• A minor and the parents have distribution goals.
• An adult who lacks capacity or skill to manage the money.
• Recently married and the parents are unsure as to the stability of the marriage.

If a beneficiary gets divorced and the assets are not in a trust, the assets may immediately become community property if the money has flowed through the beneficiary’s joint checking account. The son-in-law or daughter-in-law would have legal right to half of the assets.

3. A couple establishes a trust for the benefit of their adult child to protect the assets from their adult child’s potential creditors. Non-IRA and non-trust inherited assets immediately become the child’s property and are accessible by creditors through the court system. A beneficiary’s large medical bill or legal action could wipe out an inheritance if the funds are not placed into a trust.

4. A Credit Shelter Trust (CST) is used when an estate exceeds the Federal Estate Tax Credit ($2,000,000 in 2008). The surviving spouse is the Income Beneficiary while the children are the Remainder Beneficiaries. This trust allows a $4,000,000 estate ($2,000,000 from each spouse) to pass estate-tax-free. Without the CST, all assets above the $2,000,000 credit are federally taxed at 45% and in Washington State (if decedent lived in WA) are taxed at 15% or higher. The $4MM estate would owe $900,000 (45% X $2,000,000) in federal estate taxes and $300,000 (15% X $2,000,000) in state estate taxes.

■ Stephen Palm

Legal Information and Disclosures
This memorandum expresses the views of the author as of the date indicated and such views are subject to change without notice. Haberling Financial Group has no duty or obligation to update the information contained herein. Further, Haberling Financial Group makes no representation, and it should not be assumed that past investment performance is an indication of future results. Moreover, wherever there is potential profit there is the possibility of loss. This memorandum is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as an offering of advisory services or an offer to sell or solicit and securities or related financial instruments in any jurisdiction. Certain information contained herein concerning economic trends and performance is based on or derived from information provided by independent third-party sources. Haberling Financial Group Inc., believes that the sources from which such information has be obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based. This memorandum, included the information contained herein, may not be coped, reproduced, republished, or posted in any form without the prior written consent of Haberling Financial Group.