Family trusts can be beneficial for many reasons.
Generally drafted as “complex” trust, they provide numerous tax and creditor protection advantages. Such a trust will keep its designated assets out of the surviving spouse’s estate, serving as an effective “credit shelter” or “bypass” trust to reduce the assets from future estate tax liabilities upon the surviving spouse’s death.
Moreover, a family trust can provide asset protection for the surviving spouse, which he or she cannot provide for himself or herself. Thus, the family trust essentially shields assets today from threats that may arise tomorrow.
Why Establish a Family Trust?
Importantly, under U.S. Tax Code § 2056, transfers into a family trust do not qualify for the marital deduction. Instead, they are intentionally included in the decedent spouse’s estate, and utilizes his or her exemption amount (his or her “coupon”). Therefore, the surviving spouse does not “own” the trust assets, but the spouse may still use them. Because of this, those assets may be available for use by the surviving spouse, while simultaneously protecting them from the surviving spouse’s creditors. And with the coupon’s portability, even more flexibility for family trust planning is possible, for estate tax avoidance.
Financial Threats to Prevent with a Family Trust
There are three (3) major financial threats that will make using family trust planning extremely advantageous for the surviving spouse (particularly one who does not have a large estate):
- Lawsuit—There could be a mistake, an accident, a miscalculation, or error in judgment that leads to a costly lawsuit. This can be financially devastating. Having a family trust will protect the trust assets from the threat of litigation.
- Divorce—The surviving spouse could get remarried, but then be later divorced. The family trust will protect the trust assets from a later divorce.
- Nursing Home—If the surviving spouse later requires residential nursing home care, the lack of sufficient long-term care insurance can significantly deplete his or her assets. However, the assets of the family trust are protected from this threat.
Moreover, unlike a marital trust, the family trust need not distribute its income, which can be retained in the trust. This protects it from threats (or potential threats), such as the examples listed above. The trustee also has the option, within reasonable discretion, to distribute some or all of the income to beneficiaries other than the surviving spouse. If structured correctly, these beneficiaries would then carry the tax liability, rather than the income being subject to the compressed trust tax rates.
Family Trust Beneficiaries
There are many options as to who can be named as beneficiaries—either as direct beneficiaries of the trust or as “bypass” beneficiaries when the surviving spouse dies:
• Spouse
• Children
• Descendants
• Named Individuals
• Spouse and Children
• Spouse and Descendants
• Spouse, Children and Named Individuals
• Spouse, Descendants and Named Individuals
• Other
As you can see, there are many important reasons to use family trust planning, including to protect trust assets from future threats to your surviving spouse.
If you would like to learn more about family trust planning and other effective estate planning strategies, contact me today. Let me help you create a better estate plan that will help you protect against future threats to your family and your family’s important financial assets.
