Trusts: Many options exist, but which is right for you?

June 1, 2006

My attorney has suggested that I have trusts drafted for my estate plan, but it all seems very confusing. Can you please explain the differences among the types of trusts that physicians typically use.

A. In most estate planning strategies for physicians, a variety of trusts are used to both minimize estate tax liability and provide assistance or management for the surviving family. Of these, the most common are the revocable living trust, the marital trust, the qualified terminable interest property trust, the bypass trust, and the irrevocable life insurance trust. By gaining a general understanding of the benefits of these trusts, you can more effectively discuss with your attorney the proper strategy with regard to your current or proposed estate plan.

The marital trust is created to benefit the surviving spouse based on the unlimited marital deduction. The spouse is entitled to both interest and principal during his or her lifetime, typically without restrictions. The remainder of the estate would equal the maximum amount of the estate tax exemption, currently $2 million, and would be used to fund the "bypass trust."

If the intent is to limit the surviving spouse's access to trust assets, a qualified terminable interest property (QTIP) trust is another type of marital trust. Typically created at death, the QTIP provides trust income but limited access to principal to your spouse for his or her lifetime with the remainder passing to your children. A QTIP trust gives you complete control over the final disposition of your property and is often used in second marriages to protect the interests of children from a previous marriage.

The bypass trust, also known as the credit shelter trust or family trust, is created at death to primarily and ultimately benefit the children of the deceased. Funds, however, can also be made available, either from income or principal, for the spouse's use based on certain criteria. To ensure that the surviving spouse is taken care of first, the trust principal is not distributed to the decedent's children or other heirs prior to the spouse's death.

An irrevocable life insurance trust (ILIT) is used to own insurance policies on your life, and it manages and distributes policy proceeds according to your wishes. Using an ILIT keeps insurance proceeds, which would otherwise be subject to estate taxation, out of your taxable estate. You are not allowed to retain any powers over the policy, such as the right to change the beneficiary. For this reason, you cannot serve as your own trustee, so you must select a third party to serve in this role.

There are many other types of trust arrangements that may be utilized in physician estate plans, based on the size of the estates as well as the goals and objectives for the surviving family or charitable entities. When meeting with your estate-planning attorney, be sure he is well-informed of your wishes as well as the amount and types of assets you own.

Q. Some of my colleagues have been investing in convertible securities, but I don't really understand how these work. Is a convertible security a stock or a bond?

A. Convertibles are actually hybrids: bond-like investments that can be converted to stocks. Due to their high-yield characteristic, convertibles often prove to be relatively resilient during stock market downturns. On the flip side, if the stock market rises, convertibles may provide the growth potential more typical of stocks.