The level of sophistication of estate plans varies with the size and complexity of an individual’s estate. A carefully drafted Will or revocable inter vivos trust is the starting point for many plans. The revocable inter vivos trust is highly regarded due to its ability to effectuate testamentary dispositions without the necessity of probate. However, it still requires the effective legal transfer in trust of all testamentary property during the grantor’s life. The estate planner who utilizes only an inter vivos trust runs the risk of failing to transfer (or to effectively transfer) all property into the trust.
Despite its drawbacks, the inter vivos trust is very useful in conjunction with a Will. For example, the inter vivos trust may serve as a “standby” trust, to be funded with assets in the event of the incapacity of the grantor. The grantor may also wish that property be managed and distributed by a professional trustee, e.g., a bank, during his lifetime. The Will, which is dormant until death, cannot accomplish this. When the inter vivos trust is used in conjunction with a “pour over” Will as a testamentary instrument, its shortcomings are also minimized.
The following relatively simple documents may be important in the event of disability or incapacity: the health care proxy appoints an agent to make medical decisions in the event of incapacity. The living will states whether or not extraordinary means are to be used to keep one alive. The durable power of attorney, for financial transactions, survives incapacity, so that guardianship can be avoided. The durable power of attorney can be used to place assets into an existing inter vivos trust in the event of the incapacity of the grantor.
To accomplish the objectives of wealth transfer, business succession, and asset protection, the LLC has emerged as the clear entity of choice. The LLC can be used to shift income to lower bracket taxpayers, to shift wealth while leveraging the unified credit, and to effectively protect assets from claims of creditors. Favorable basis rules make the LLC an extremely attractive vehicle for real estate. The LLC operating agreement can provide for succession of a family business after the death of a member.
Life insurance purchased by an irrevocable trust can provide wealth to beneficiaries at no estate tax cost. Premiums may be funded by gifts qualifying for the annual exclusion. Other irrevocable trusts may be formed to hold property in trust for children, to be distributed to them in the event of the unexpected loss of their parents, or to be held until they reach mature years.
Split interest trusts offer the potential to transfer assets of substantial value at little or no gift tax cost. The grantor may also retain a fixed annuity, a right to yearly income, or a right to enjoy property transferred to the trust. At the time of creation of the trust, a taxable gift is made only to the extent of the gifted remainder interest. Charitable trusts, also useful, are discussed in this issue.