Don’t be intimidated by the complexity of trusts

What are the basic steps to utilizing a trust?

Trusts are frequently used in effective estate planning to provide management of assets as well as minimize probate expenses and estate taxes. Despite their apparent complexity, trusts can be extremely useful in many aspects of planning your estate.

To thoroughly understand trusts, you need to know the various roles of the parties affiliated with the trust. First, there’s the grantor. This is the individual who transfers funds into the trust. Next is the trustee, who makes certain the terms of the trust, as outlined by the grantor, are carried out. Finally, there is the beneficiary. The beneficiary is the individual (or individuals) for whom the trust has been created. Often a minor, the beneficiary can also be a surviving spouse, adult child, or any individual in need of financial assistance (or supervision) after the death of the grantor.

Knowing these basics, you can then focus on the different types of basic trusts most often used for estate planning purposes. The first is a testamentary trust. This trust is usually part of a will and comes into existence after death. With a testamentary trust, assets are passed through probate before being managed by the trust. The trust can then help divide assets for each beneficiary, manage assets, or distribute assets as required by the directions of the trust.

A living trust may also be known as an inter vivos trust. Basically, this trust is created during the life of the grantor. Assets are transferred into the trust and will thus avoid probate at the time of death. As an added benefit, living trusts will provide benefits during life, particularly in the event of the incompetency of the grantor. A living trust will identify a list of contingent trustees who are able to assume the managerial responsibilities of the trust in the event the original trustee (usually the grantor) is unable to perform their duties. Such forethought will avoid the excessive legal costs involved if a grantor is declared incompetent, since in such cases, annual accountings to the court are required.

A trust can be a highly effective method of controlling the management and distribution of assets. However, a trust only works to the extent that assets have been transferred into the trust. Oftentimes, physicians spend hours in their attorneys’ offices creating what they hope will be the perfect trust arrangement for their estate. Unfortunately, many never get around to transferring their assets into the trust. If you create a trust for your estate plan, make certain your assets are titled in the way necessary for the trust to work, since asset titling and beneficiary designations take precedence over the directives of your will or trust.

For example, if you have a large life insurance policy naming your surviving spouse as beneficiary, a residence and summer home jointly titled with your spouse, and various investment accounts also jointly titled with your spouse, all of that will pass directly to your spouse, bypassing any trust arrangement you paid to put in place. Then, whatever plans the survivor has made (or may make) will be the controlling factor for all assets going forward.

To control the distribution and management of the assets and minimize estate tax liability and ultimately probate expenses, it is necessary to revisit all titling and beneficiary designations. Your estate-planning attorney, working in tandem with your investment and insurance advisers, can assist in this process to ensure a well-coordinated and effective estate plan.

I am beginning to think about retiring in a few years. What do I need to know?

Exercising discipline makes the difference between financial independence security and failure. Use the following “checklist for a successful retirement” as a starting point:

• Have your financial planner prepare a retirement income projection to ensure there are adequate assets to support your retirement standard of living.

• Anticipate and prepare for non-financial changes. After being with patients and colleagues for so long, many physicians miss the social aspect of medicine.

• While working a full schedule, have a business valuation conducted on your practice. This should provide a starting point for discussions about selling your share of the practice. Selling a practice may take upwards of 2 years.

• Determine liability coverage options and other asset protection strategies to be used during retirement.

• Map out a strategy to coordinate the tax treatment of income generated from the rollover of qualified retirement plan assets.UT