Frequent readers of this column know that I regularly harp on the need for a basic estate plan. This should include a Will or revocable living trust, a durable power of attorney, and an advance directive for healthcare. If you don’t have at least these minimum documents in place, your estate is at risk.

For those of you with special needs, there is a wealth of additional tools available to you. These tools can help you accomplish any number of purposes. For those with taxable estates, they can help you reduce or even eliminate estate taxes at your death. They can also help you arrange your affairs to avoid problems among your beneficiaries after you are gone. They can help you fulfill your charitable desires. If you own your own business, they can help you transfer its operations seamlessly and efficiently to those who will operate it in the future. If you have a child who is receiving government assistance, you can make sure your death does not adversely affect his or her entitlements. They can provide incentives for higher education or accomplishments. They can make sure the family heirlooms are received by your intended recipients. Finally, they can provide for your care and well being for the rest of your life.

There isn’t enough room in this column to address the various planning techniques in detail, so I thought I would just try to hit the high points.

The best estate planning you can do is to give away your property while you are still alive. If you do, be sure you retain enough funds to provide for yourself during your lifetime. You should only engage in a gifting program if you have sufficient assets to be able to address any eventuality that might occur, including medical problems and disability issues. The other time you may want to consider a gifting program is if you are attempting to qualify for Medicaid or other government benefits.

If you aren’t comfortable making gifts to your children or others because of their age or inability to handle money, you might consider establishing a Crummey trust. Typically you make a contribution to a trust for the benefit of your child or other beneficiary of up to $11,000 per year (the amount you are allowed to give each year tax free). The beneficiary is then given a period of time, often 30 days from the date of the gift, to withdraw the funds from the trust. If the funds aren’t withdrawn within that time, they become part of the principal of the trust.

The law allows you to create trusts which are intentionally defective for income tax purposes, for estate tax purposes, or for both. Let’s say you want to remove some property from your taxable estate by giving it to one of your children, but you don’t want him to have to pay the taxes on the income. You can set up an income tax defective trust which will effectively remove the assets from your estate for estate tax purposes while requiring you to pay the income tax on the earnings, thus reducing the size of your estate even further.

While most trusts are set up so they distribute all of the trust assets during the beneficiary’s lifetime, it is possible to establish one in which the assets remain in the trust during the beneficiary’s entire lifetime, subject to payment of income and a right to invade the principal, and then pass on to the beneficiary’s descendants. This is commonly referred to a generation skipping or dynasty trust. There are two primary reasons why you would want to establish a "dynasty" trust. First, to protect the trust funds from the beneficiary’s creditors, and second, so the trust funds are not included in the beneficiary’s estate at his death. The last reason becomes important if the beneficiary already has an estate which will be subject to estate tax at his or her death.

There are four primary types of grantor retained trusts. The first two types are the Grantor Retained Annuity Trust (GRAT) and the Grantor Retained Unitrust (GRUT). With these, you contribute a certain amount when the trust is created and then receive a payment back from the trust each month. With a GRAT, you receive a percentage of your initial contribution and with a GRUT, you receive a percentage of the assets in the trust for the year. These are very helpful if you have an asset which is growing in value since you "freeze" its value when you transfer it to the GRAT or GRUT. At the end of the annuity or unitrust period, usually 2-5 years, the beneficiary receives whatever remains in the trust free of tax.

Another form of grantor retained trust is the Grantor Retained Income Trust (GRIT). To use a GRIT, the beneficiary cannot be related to you. You receive the income and dividends from the GRIT during the term of the trust and the beneficiary receives whatever is left of the principal. If you contribute a residence to a GRIT, you can retain the right to live in it for a term of years or even the right to repurchase it from the GRIT before the end of the trust term.

The final form of grantor retained trust is the Qualified Personal Residence Trust (QPRT). I discussed the QPRT in an earlier article (which is archived on our website), so all I will say is that it is a way for you to transfer your home to a trust, retain the right to live in it, and then have it pass to the remainder beneficiary.

There are as many estate planning methods as there are days in a month. Unfortunately, it isn’t as simple as walking into Dillard’s and pulling a shirt off the rack. You can’t walk into your lawyer’s office, pull an estate plan off the shelf, sign it, and walk away confident that everything is in order. Each client’s situation is as different and individual as a snow flake. There is no such thing as a "one size fits all" trust or estate plan despite the attempts of many trust mills to convince you otherwise.

If you don’t have at least a basic estate plan in place, please consult with an estate planning professional who can help ensure your property passes to those you intend with the least cost and aggravation.

©2003 Jerry Shiles