For many, a trust can help accomplish both of these important jobs. Atrust is a legal entity-similar to a corporation-which owns and distributes assets according to the wishes of the person establishing it.

Often, trusts help reduce or eliminate estate taxes and provide other valuable benefits.

There are many different kinds of trusts, each designed to accomplish a specific objective. The credit shelter trust, for example, is useful forensuring that both members of a married couple will have the benefit of the $625,000 exemption that every individual can pass on to heirs without any estate tax consequences (the $625,000 exempted amount corresponds to the 1998 exemption from estate taxes, which will gradually rise to $1 million by the year 2006).

For this example, it is assumed that Tom and Mary Jones have joint property of $1.250 million including their home, retirement funds andinvestments. They have everything set up so that when one of them dies,all the assets become the property of the other spouse. When the secondspouse dies, his or her individual exemption is still $625,000, leaving the other $625,000 vulnerable to estate taxes that begin at the 37 percent level – resulting in a tax of at least $246,250.

Tom and Mary could each establish a credit shelter trust that would receive $625,000 at the death of the first spouse, leaving $625,000 as the property of the surviving spouse. The trust can provide lifetime income tothe surviving spouse, as well as a limited right to principal.

The real difference occurs upon the death of the second spouse. Tom andMary’s heirs receive the second spouse’s bequest of $625,000 that is exempted from estate tax as well as the entire value of the earlier deceased’s credit shelter trust, with no estate taxes due. The heirs saveat least $246,250 in taxes, and possibly more if the assets have grown in value during their time in trust.

But what if Tom and Mary were fortunate enough to have $2 million at the time the first spouse dies? Even if the two $625,000 exemptions were used, that would leave $750,000 left unsheltered from estate taxes.

Three possible ways to preserve the excess $750,000 of Tom and Mary’s estate in trust while both partners are still living include: 1. An irrevocable life insurance trust. The trust owns an insurance policythat will provide enough money to pay any estate taxes owed. As propertyof the trust, the insurance death benefit is not included in anyone’s estate.

2. A charitable remainder trust. The charitable gift will reduce the estateby $750,000, but also will provide income for life to both spouses, as well as a current tax deduction for the future value of the gift going to charity.

3. A combination of the two. Provides all the tax benefits and replaces forheirs the money that eventually will go to charity with an insurance policy owned by the trust.

For the best uses of trusts in specific cases, a financial advisor in conjunction with a tax and legal counsel, can help provide strategic direction for administration by a trust company.

However one’s trust and estate planning is accomplished, it’s wise to remember the advice of Oliver Wendell Holmes: “Put not your trust in money, put your money in trust.”(Alan S. Moore is a financial advisor of Legg Mason Wood Walker, Inc., adiversified investment brokerage and financial services firm in New Orleans.)Back to Top

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