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Revocable | Irrevocable | Life Insurance Trust

Simple Revocable Trust:

USE - Estate Planning

The Simple Revocable Trust can be described as a contract among three (3) people or groups of people:

  1. The Grantor - The person/entity who establishes the trust,
  2. The Trustee - The person/entity that will administer the trust pursuant to the terms and conditions of the trust,
  3. The Beneficiaries - The person/entities that the Grantor has selected to receive assets during their life and upon their death.

With a Simple Revocable Trust the client can be all three - grantor, trustee and beneficiary.

The Simple Revocable Trust is without question a powerful domestic estate planning device. Its advantages are so substantial that it is hard to describe them and be brief. Some of the primary advantages of the Simple Revocable Trust are:

  • The Simple Revocable Trust eliminates the probate process and all of its corresponding disadvantages.

  • The Simple Revocable Trust assures that the client can distribute their assets according to the client’s wishes, and not the wishes of another person. In addition, if the client desires, the client can pass their assets to those of the client’s choice over and extended period of time.  

    As an example, a frequently used distribution pattern is for the beneficiaries to receive one third of their inheritance upon the death of the client, one half of the balance five years later and the remaining balance five years after that. This pattern is frequently used to make sure the beneficiaries are not placed in a position of losing all of the assets at one time or inadvertently wasting the assets because of a lump sum gift to them.  Again, the choice is the client’s and the client can be as imaginative as the client wishes regarding how they may want to distribute their assets to those of their choice.

  • The Simple Revocable Trust can be amended at any time prior to death to take advantage of any changes in the client’s family circumstances, economic circumstances or take advantage or react to any changes in the law.

  • The Simple Revocable Trust allows the client to maintain full and complete control over their assets during their life.

The Simple Revocable Trust does have a major defect. It offers zero asset protection, zero income tax or capital gains tax planning, and is limited in its estate tax planning by certain rules and regulations. However, we will discuss where applicable how to gain asset protection, reduce income and capital gains taxes along with the elimination of estate taxes as we proceed.

Having said that there are defects, we still believe that the Simple Revocable Trust is an integral part of most estate plans.

AB or ByPass Trust:

USE - Estate Planning

The AB or ByPass Trust is part of the family of revocable trusts. These specific types of trusts have all of the same elements found in any other revocable trust.

Some of the primary advantages of the AB or ByPass Trust are:

  1. The AB or ByPass Trust eliminates the probate process and all of its corresponding disadvantages.

  2. The AB or ByPass Trust assures that the client can distribute their assets according to the client's wishes, and not the wishes of another person. In addition, if the client desires, the client can pass their assets to those of the client's choice over an extended period of time.

    As an example, a frequently used distribution pattern is for the beneficiaries to receive one third of their inheritance upon the death of the client, one half of the balance five years later and the remaining balance on the tenth anniversary of the client’s death. This pattern is frequently used to make sure the beneficiaries are not placed in a position of losing all of the assets at one time or inadvertently wasting the assets because of a lump sum gift to them. Again, the choice is the client's and the client can be as imaginative as the client wishes regarding how they may want to distribute their assets to those of their choice.

  3. The AB or ByPass Trust can be amended at any time to take advantage of any changes in the client's family circumstances, economic circumstances, or to take advantage or react to any changes in the law.

  4. The AB or ByPass Trust allows the client to maintain full and complete control over their assets during their life.

As we indicated at the beginning there are basically two types of Revocable Trusts:

  1. Simple Trust - either single or married
  2. AB or ByPass Trust which are only available to Federally recognized spouses.

Either type of Revocable Trust offers tremendous estate planning opportunities. Both types of Revocable Trusts eliminate in all but Connecticut both the cost of probate and in all states eliminates the time and costly probate process.

The difference between the two types of trusts is what happens with a Federally recognized married couple at the first death. With a simple trust all of the assets, unless segregated into a separate asset trust or designated to be distributed to a person other than the surviving spouse, reside in the same asset pool.

With the AB or ByPass Trust the asset can be segregated into two separate and distinct pools. One pool being titled the “B” Trust and the other pool being titled the “A” Trust. With the ByPass Trust the labels are different but the end results are the same as with the AB Trust. The A Trust becomes the pool of assets that are available to the surviving spouse. This part of the trust remains revocable and the trustee of this trust, normally the surviving spouse, has total control of those assets.

The B Trust is established to lock in assets that are intended for the beneficiary of the deceased spouse. The trustee of the AB Trust, at the time of the death of the deceased spouse, has 90 days after the death of the deceased spouse to determine which assets will be assigned to which trust. The B Trust becomes irrevocable. However, language is usually added to the B Trust that allows for the surviving spouse to receive the income of the assets of the B Trust and language may be added that would allow the trustee of the B Trust to invade the corpus (asset base) of the B Trust for the health, education and welfare of the surviving spouse.

The gain in using the AB Trust is basically two fold:

  1. The asset value of the B Trust will, upon the death of the surviving spouse, pass to the beneficiaries of the B Trust with zero Federal estate tax.
  2. The assets of the B Trust are segregated and are held for the beneficiaries of the B Trust, hence “protected” from their being squandered or vaporized.

The AB Trust is frequently used in second marriages or where there are children of a prior union that a spouse desires to protect.

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