10. What do I do if the grantor is incapacitated? (Part 2)

If there are minors or other dependents, you will need to look after their care. The trust may have specific instructions. If the grantor’s incapacity is expected to be lengthy, a guardian (of the person, not assets) may need to be appointed by the court. The attorney can help you with this.

Become familiar with the finances. You need to know what the assets are, where they are located and their current values. You also need to know where the income comes from, how much it is and when it is paid, as well as regular ongoing expenses. You may need to put together a budget.

If you cannot readily find this information, others (family members, banker, employer, accountant) may be able to help you. Last year’s tax returns may be helpful. Also, if you discover any assets that were left out of the trust, the attorney can help you determine if they need to be put into the trust and can then assist you.

Apply for disability benefits through the grantor’s employer, social security, private insurance and veteran’s services. Notify the bank and other professionals that you are now the trustee for this person. Put together a team of professionals (attorney, accountant, banker, insurance and financial advisors) to help you. Be sure to consult with them before you sell any assets.

Now you can start to transact any necessary business. You can receive and deposit funds, pay bills and, in general, use the person’s assets to take care of him or her and any dependents until recovery or death.

You’ll need to keep careful records of medical expenses and file claims promptly. Keep a ledger of income received and bills paid. An accountant can show you how to set up these records properly. The trust may require you to send accountings to the beneficiaries. Also, don’t forget income taxes (due April 15) and property taxes.

Share

17. Benefits of a Charitable Remainder Trust

  • Convert an appreciated asset into lifetime income.
  • Reduce your current income taxes with charitable income tax deduction.
  • Pay no capital gains tax when the asset is sold.
  • Reduce or eliminate your estate taxes.
  • Gain protection from creditors for gifted asset.
  • Benefit one or more charities.
  • Receive more income over your lifetime than if you had sold the asset yourself.
  • Leave more to your children or others by using life insurance trust to replace gifted asset.
Share

16. So what’s the catch?

There really isn’t one. Combining a charitable remainder trust with an irrevocable life insurance trust is a winning formula for everyone — you, your children and the charity.

You convert an appreciated asset into lifetime income, and because you pay no capital gains tax when the asset is sold, you receive more income than if you had sold it yourself and invested the sales proceeds. You receive an immediate charitable income tax deduction, reducing your current income taxes. And by removing the asset from your estate, you reduce estate taxes that may be due when you die.

With the life insurance trust replacing the full value of the asset, your children receive much more than if you had sold the asset yourself, and paid capital gains and estate taxes. Plus the proceeds are free of income and estate taxes, and probate.

Finally, you will make a substantial gift to a favorite charity. And because the charity knows it will receive the gift at some point in the future, it can plan projects and programs now — benefiting even before receiving the gift.

Share

15. Why use a life insurance trust?

With a trust, the insurance proceeds will not be included in your estate, so you avoid estate taxes. You can keep the proceeds in the trust for years, making periodic distributions to your children and grandchildren. And any proceeds that remain in the trust are protected from irresponsible spending and creditors (even spouses).

Life insurance can be an inexpensive way to replace the asset for your children. (Every dollar you spend in premium buys several dollars of insurance.) Insurance proceeds are available immediately, even if you and your spouse both die tomorrow. And, in addition to avoiding estate taxes, the proceeds will be free from probate and income taxes.

Share

14. Sounds great for me. But if I give away the asset, what about my children?

If you have a sizeable estate, the asset you place in a CRT may only be a small percentage of your assets, so your children may be well taken care of. However, if you are concerned about replacing the value of this asset for your children, there is an easy way to do so.

You can take the income tax savings, and part of the income you receive from the charitable remainder trust, and fund an irrevocable life insurance trust. The trustee of the insurance trust can then purchase enough life insurance to replace the full value of the asset for your children or other beneficiaries.

Share

11. Who should be the trustee?

You can be your own trustee. But you must be sure the trust is administered properly — otherwise, you could lose the tax advantages and/or be penalized. Most people who name themselves as trustee have the paperwork handled by a qualified third party administrator.

However, because of the experience required with investments, accounting and government reporting, some people select a corporate trustee (a bank or trust company that specializes in managing trust assets) as trustee. Some charities are also willing to be trustees.

Before naming a trustee, it’s a good idea to interview several and consider their investment performance, services and experience with these trusts. Remember, you are depending on the trustee to manage your trust properly and to provide you with income.

Share