Friday April 26, 2024
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3.9.1 Revocable Trust - Liquidity and Probate
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Revocable Trust - Liquidity and Probate
Liquidity: Seniors in America are living longer. Many seniors will experience 20 to 30 retirement years.
Living Trust: One type of revocable trust is a living trust.
Revocable Trust - Charity as Trustee: While the individual frequently serves as trustee of his or her living trust, many individuals desire to be free of trust management and investment responsibilities.
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Liquidity
Seniors in America are living longer. Many seniors will experience 20 to 30 retirement years. They will need to cover living costs and medical care during that period of time.
As longevity continues to increase, perhaps one-third of women who are retirement age will reach age 95 or 100. As a result, it is essential to maintain reasonable levels of liquidity.
Irrevocable trusts such as a charitable remainder unitrust provide excellent tax benefits. The bypass of capital gain and income tax savings is very attractive. However, no more than one-third to one-half of any estate should be transferred into an irrevocable trust. If an individual has a moderate size estate or smaller, this may mean that very little if any of the estate should be transferred into an irrevocable trust. Preserving liquidity is an important objective. The revocable or living trust is an excellent means for doing so.
Living Trust
One type of revocable trust is a living trust. Many individuals look at this as an excellent addition to a will. The living trust provides privacy, avoids probate and enhances security. If the individual is not able to manage his or her living trust, then a designated successor trustee may take over. The successor trustee may make certain that appropriate management is in effect for the securities, real estate and other assets in the trust. In addition, the successor trustee may make payment for medical expenses or other necessary expenditures from the trust.
A living trust is quite often accompanied with a durable power of appointment for medical care and a living will. The combination of these two instruments in the living trust provides great comfort and security for seniors.
Revocable Trust - Charity as Trustee
While the individual frequently serves as trustee of his or her living trust, many individuals desire to be free of trust management and investment responsibilities. Particularly as one becomes more senior, there comes a time when it may be preferable to allow some other entity or person to manage assets.
One method for achieving this goal is to allow a charity to serve as trustee of a revocable trust. Some charities provide revocable trust services at reasonable cost. These charities free the donor from the responsibility of trust administration and management.
With a revocable trust, income is distributed to the trust grantor. If necessary, principal may be invaded for his or her benefit. In addition, the trust grantor may revoke the trust in whole or in part at any time. This plan provides good trust management and liquidity for a senior person. After he or she passes away, the balance of the trust principal is transferred to one or more qualified exempt charitable recipients. This distribution qualifies for an estate tax charitable deduction. Sec. 2055(a).
Example 3.9.1A
Sharon Green has carefully accumulated a substantial estate. She has always saved and has a reputation with her friends as a careful accumulator. Over the 80 years of her lifetime, she now has built up an estate valued at $2,000,000.
Sharon owns her home and certificates of deposit. In addition, she has a securities portfolio of approximately $1,000,000. She desires to receive trust services and plans eventually to leave a substantial part of the estate to charity.
Sharon discusses planning options with her favorite charity and decides to create a $1,000,000 revocable trust with that charity. The charity will serve as trustee and will invest the $1,000,000 together with the other investments of the charity.
Sharon receives the income from the $1,000,000 quarterly. She may revoke or invade the principal at any time if she has a medical need or other desired expenditure. When Sharon passes away, the revocable trust will be transferred to charity and will qualify for a charitable estate deduction. This will reduce her estate to a level that will zero the estate tax.
Sharon receives the income for life, has complete access to the liquidity and is pleased to know that there will be zero estate tax. Plus, she will benefit her favorite charity when she passes away.
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Case Studies on Revocable Trust - Liquidity and Probate
Refund Due for Termination of "Single" Status, Part 3 of 3:
Steve Reid, 80, retired fifteen years ago after working most of his life as a product manager for a Fortune 500 company. At the age of 78, Steve, a widower, decided to move into a retirement community in south Florida. The retirement community required an entrance fee of $50,000 from all new residents. However, the fee would be refunded over time using an amortized schedule.
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