What Is Paid-In Capital In Excess Of Par Value-Common Stock Help Preserve Assets And Provide For Loved Ones With A Trust

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Help Preserve Assets And Provide For Loved Ones With A Trust

As part of your year-end planning, take a moment to consider what will happen to your assets and surviving family when you are no longer able to care for them. Then consider the potential benefits of creating a trust. Trusts are an effective means of protecting important assets, providing for beneficiaries and managing taxes. And, contrary to popular belief, trusts aren’t just for the wealthy.

A qualified attorney can help you create a trust fairly easily that can be used for a variety of practical purposes, such as:

o Asset control and security for beneficiaries.

o Providing for beneficiaries who are minors or who require expert money management assistance.

o Avoidance of property or income taxes.

o Providing expert estate management.

o Avoidance of inheritance costs.

o Privacy protection.

o Protection of property or business.

Definitions of Trust – A Quick Guide

A trust is a legal arrangement in which you, the owner of property and the grantor, transfer ownership of that property to someone else – the trustee – for the benefit of one or more third party beneficiaries. The trustee, which can be an individual or a corporation, receives title to the property under the terms of the trust deed.

There are two general categories of trusts: revocable and irrevocable. Revocable trusts can be modified or “revoked”. Irrevocable trusts cannot be changed once they are created. Most revocable trusts become irrevocable upon the death or incapacity of the grantor. Assets you place in an irrevocable trust are permanently removed from your estate. Income and capital gains tax on assets in the trust is paid by the trust. After your death, the assets in the trust are not considered part of your estate and therefore are not subject to estate tax.

Trust for any purpose

There are many different types of trusts – each serving specific needs and associated with different tax and legal considerations. Although a detailed discussion of the many different types of trusts is beyond the scope of this article, the following is a brief overview of several commonly used trusts.

Living trust. A living trust allows you to be both the trustee and the beneficiary of the trust while you are alive. You retain control of the assets and receive all returns and benefits. After your death, the designated successor trustee manages and/or distributes the remaining assets according to the terms set forth in the trust, avoiding the probate process. Living trusts are also an ideal way to ensure that your financial affairs are managed in the event of incapacity. You, not the courts or a family member with an improper motive, choose who manages your finances.

Credit Shelter Trust. Married couples enjoy many protections when it comes to estate planning. For example, under the unlimited marital deduction, spouses do not have to pay federal estate tax on assets transferred to each other. This benefit is good until the death of the surviving spouse, after which non-spousal beneficiaries (typically children) may face a significant federal estate tax on any amount that exceeds the current estate tax exclusion (2 million dollars until 2008).

To avoid this problem, couples should include a loan fund in their estate planning documents. With a credit shelter trust, you divide your property into two parts. One portion remains with your husband and the other is held in trust. Any amounts left to your spouse are tax-free because of the unlimited marital deduction, while those in the trust — up to $2 million — are protected by the estate tax exemption.

If your spouse dies, the trust assets will pass to your children or anyone else you named as beneficiaries. Trust assets will not be taxed as part of your spouse’s estate. Assets that went immediately to your spouse will go to whomever your spouse chooses. These assets will be included in your spouse’s estate for tax purposes, but your spouse’s own exemption will offset some or all of the tax due. Using this planning technique, a couple can pass up to $4 million to their children or other beneficiaries estate tax-free.

Irrevocable Life Insurance Trust (ILIT). This type of trust is often used as an estate tax financing mechanism. Under this arrangement, you make gifts to an irrevocable trust, which in turn uses those gifts to purchase a life insurance policy on you. Upon your death, the death insurance proceeds are paid to the trust, which in turn provides tax-free cash to help the beneficiaries meet their estate tax obligations.

Qualified Personal Residence Trust (QPRT). A QPRT allows you to remove your residence from the estate at a discount. Under this arrangement, you get to use the home for a predetermined number of years, after which ownership is transferred to a trust or beneficiaries. Any gift tax you may incur on the transfer of the property is reduced because you still have rights to the home for the years specified in the trust. A potential downside is that if you die before the trust expires, the house is considered part of your estate.

Charitable funds. To benefit your favorite charity while serving your own trust purpose, you may want to consider setting up a Charitable Lead Trust (CLT) or a Charitable Remainder Trust (CRT). CRTs and CLTs are often described as mirror images of each other: CRTs provide an income stream that is paid to a donor, family member, or other beneficiary over a specified period of time, after which the remainder goes to charity. CLTs, in contrast, pay a stream of income to the charity over a number of years, after which the remainder is paid to a designated beneficiary, usually a family member.

Perhaps one of the biggest advantages of trusts is that they allow the beneficiaries to enjoy the property while minimizing the tax burden on the participants. Keep in mind that trusts are legal documents – an estate planning attorney can help explain the complexities of specific trust arrangements.

This article is not intended to provide specific investment or tax or legal advice to any person. Consult your financial advisor, tax advisor and qualified attorney or me if you have any questions.

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