Which type of financial trust is right for you?

January 1, 2010

Estate planning strategies utilize various trusts to minimize estate tax liability as well as provide assistance or management for the surviving family.

Key Points

Q: What are the most common types of trusts used by physicians in planning their estates?

The advantages of the revocable living trust are that assets titled within the trust will avoid probate costs and delays, and there is protection of your privacy since your assets do not become public record. Trust assets are ultimately distributed, often to additional types of trusts known as testamentary trusts, which come into existence at the time of death. Revocable living trust agreements typically provide that assets will be distributed at death to the marital trust and the bypass trust.

Marital trust. 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 for that year and can be used to fund the "bypass trust."

Bypass trust. The bypass trust, also known as the credit shelter trust or family trust, is created at death to benefit the children of the deceased. Funds, however, can also be made available, either from income or principal, for the spouse's use during his/her lifetime 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.

Qualified terminable interest property 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/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.

Irrevocable life insurance trust. 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 a physician's estate plan, based on estate size and the goals and objectives of the surviving family members or charitable entities. When meeting with your estate-planning attorney, be sure they know your wishes, as well as the amount and types of assets you own.

Q: What are the key points in maximizing the benefits of working with a financial adviser?

A: Be specific when communicating with your adviser about your financial goals, and be open to constructive input. The best way to guarantee that your portfolio continues to support your objectives is to talk openly and frankly to your adviser about them. Let your adviser know exactly what you expect from your investments as well as from the adviser, and make sure you are comfortable with your choices. Here are some other ways to get the most out of your adviser:

Read your mail. Don't discount investment materials as junk mail. Many of these materials provide valuable information that impacts your portfolio. The more you read, the more you'll learn about your own investments and other investment options. If you have questions about the materials, ask your adviser.

Ask your adviser questions. If you read or hear something you don't understand-ask. It's your responsibility to tell the adviser what you need.

Expect the market to continue to fluctuate. Advisers cannot eliminate market fluctuations, but they can design and implement strategies to minimize volatility.

Joel M. Blau, CFP, is president and Ronald J. Paprocki, JD, CFP, CHBC, is chief executive officer of MEDIQUS Asset Advisors, Inc. in Chicago. They can be reached at 800-883-8555 or blau@mediqus.com
or paprocki@mediqus.com