Many modern estate plans incorporate the use of revocable trust agreements (RLTs) as a substitute for a will so the assets in the trust do not go through probate.
Within the RLT, clients will often direct that assets be left in a trust (an irrevocable) for the benefit of loved ones (usually their children) instead of outright.
The benefits of leaving assets into a trust for their benefit are many and include: 1. asset protection (assets left into a properly drawn trust will not be subject to most lawsuits including divorce) 2. estate tax avoidance (assets left into a properly drawn trust will not be subject to estate taxation in the beneficiary's estate); and 3. control of assets (assets left into a properly drawn trust can be directed to stay in the blood family).
Nowadays, points 1 and 3 are usually what concerns clients the most.
In this regard, if estate taxes in the beneficiary's estate are not a concern, then, in order to achieve maximum step up in basis at the death of the beneficiary, it is advisable to consider giving the beneficiary a general power to appoint the assets so it will be included in their estate, and thus they can get the full step up in basis at their death.
In addition, it is a good idea to review estate plans that leave assets "in trust" so as to ensure the trustee has full authority to treat capital gains as income that is distributable net income to beneficiaries. The reason for this is it provides the trustee with the ability to achieve maximum total return taking into account income tax considerations.
Absent provisions that permit this, capital gains incurred within these irrevocable trusts might have to be reported at the trust level, which can result in a higher rate of tax due on gains.
Furthermore, if the main goal is asset protection and you are trying to protect assets once inherited from loss to equitable distribution in a divorce, and generally to keep money in your blood family, it is advisable to name an independent party who would have absolute and pure discretion in making distributions of income or principal. If the child or loved one who is beneficiary has the ability to fire the trustee for any reason, so long as a new independent trustee assumes the role, the asset protection purpose of the trust is best accomplished.
Careful analysis of each individual case is crucial to success. It is a mistake to only focus on probate avoidance.
In sum, when it comes to estate planning, one size does not fit all. Careful scrutiny of all the issues is necessary if you are to achieve maximum benefit for your family.
Mark F. Winn, J.D., Master of Laws (LL.M.) in estate planning, is a local asset protection, estate and elder law planning attorney. mwinnesq.com