Trust Administration

• WILLS
• TRUSTS
• CHARITABLE REMAINDER TRUSTS

WILLS

A person who has a well-drafted will in Nevada has not finished organizing the distribution of an estate.  A will generally does nothing to avoid a costly and time- consuming probate, nor does it provide for incapacity or disability.   

Generally

A person in Nevada can determine by will who will be the beneficiaries of the person's estate if the testator is over 18 years old, is of a sound mind, and is not under undue influence or duress.  A will may be in the handwriting of the testator (a "holographic will") if it meets the requirements above and if the whole document is in the person's handwriting.  The person also must sign and date such a will.  A computer-generated or typewritten will must, in addition to other requirements, be properly witnessed by two disinterested witnesses. 

Wills may either distribute property directly to beneficiaries (called a "simple will") or may distribute property to a trust, which in turn distributes property to beneficiaries (called a "pour-over will”).  Other wills, not often used in Nevada, may distribute the property to a trust on behalf of a beneficiary (called a "testamentary trust" because the trust comes into existence after the death of the person making the will). 

Probate

In states that have adopted the Uniform Probate Code (Nevada has not, unfortunately), a simple will can be used to distribute property without incurring significant probate fees.  Other reasons may cause a person to distribute property through a trust in these states, but the costs and delay of probate are not among them. In Nevada, however, use of a simple will to distribute the property almost surely multiplies the cost and time of distributing an estate. 

For that reason, a typical estate plan in Nevada will include the use of a trust to avoid probate.  Many assets should be re-titled to the trustee of the trust--who generally is the person setting up the trust.  Some assets, like retirement assets, should not necessarily be transferred to a trust.  (Whether a particular asset should be transferred to a trust should be considered with a qualified professional.)  If a person neglects to transfer assets to the trust, the asset may then become a part of the person's probate estate.  If a pour-over will was executed, such property will be distributed to the trust after the property has been subject to a probate proceeding.  

Other Considerations

Even though a will does nothing to avoid probate, everyone should have a will.  For example, a will is necessary to appoint an executor of your estate and a guardian for your minor children.  Also, if a person makes an unwise choice for the trustee of a trust--a person who does not follow the trust terms or even misappropriates property--it is better to have the court administer the distribution of an estate.   Please call us if you have other questions regarding the issues set forth above, or other issues related to your estate plan.

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TRUSTS

Revocable Living Trusts

A revocable living trust is an agreement between you and a trustee for the trustee to hold assets for the benefit of the trust’s beneficiaries.  The individuals setting up the trust usually act as the trustees of the trust for the benefit of the trust beneficiaries.  You retain complete control of the trust assets during your life.  You also retain the right to change the trust at any time, and to revoke the trust. 

In Nevada, the revocable trust is widely used to avoid probate.  If your property is transferred to the trust prior to your death, probate is usually not necessary.  Your successor trustee will distribute the assets according to the terms of the trust.  Individuals who expect privacy in the distribution of their estate, or who hold property in more than one state or in foreign countries also should use a revocable living trust.  A revocable trust can also be used to minimize estate taxes. Another reason to use a revocable living trust includes providing that assets be held in trust and not distributed I a single sum to beneficiaries.  This is appropriate when providing for minor children and profligate children.  Additionally, a revocable living trust can provide that a successor trustee will assume the trusteeship upon a declaration of the trustee’s incompetence.

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CHARITABLE REMAINDER TRUSTS

If you desire to make a gift to charity, you should consider a charitable remainder trust ("CRT") to reduce income, gift, and estate taxes.  Of course, a CRT works best when you ensure that you use appropriate property to fund the trust.

Generally

A CRT is a trust established to provide one or more beneficiaries with a present income interest, with a remainder interest to a qualified charity.  After a set term (measured by a number years or a lifetime), the income interest terminates and the trust property passes to the charity.  Under Federal tax laws, all assets transferred to charity are exempt from gift and estate tax.  You are therefore allowed an income tax charitable deduction when you create the CRT under certain circumstances.  Moreover, the value of the interest that goes to charity will not be part of your estate for gift and estate tax purposes.

Types of CRT

A CRT may be established as a charitable remainder annuity trust or a  charitable remainder unitrust.  Both trusts require income payouts at least annually to the income beneficiaries for a term of up to 20 years, or for the life of you, your spouse, or other persons you  designate.  Both trusts also require a payout rate of no less than 5%.  

The two types of trusts also have significant differences.  Generally, an annuity trust provides a fixed payment to its income beneficiaries while the unitrust provides a variable payment.  With an annuity trust, the return is a fixed amount of not less than a certain percentage return, calculated on the initial net fair market value of the assets transferred to the trust.  The annuitant must be paid out of principal if the trust income is insufficient to meet the payout requirements.

The unitrust percentage return is fixed at not less than 5%, but the annual payout is calculated on the basis of the value of the trust assets as determined annually.  Therefore, the beneficiary probably will receive unequal payments each year.  If the trust assets are in stocks or bonds, for example, the annuitant’s payments will fluctuate with portfolio values.  Unitrusts can pay the fixed amount out of income and principal unless it is an "income only" unitrust.  In that event, the trust pays the lesser of income or the fixed percentage.

Another difference concerns subsequent contributions of assets, which are not permitted for an annuity trust after the initial contribution is made.  Unitrusts, however, may allow subsequent contributions under the appropriate circumstances.

Tax Aspects of a CRT

Significant income tax advantages are possible with the use of a CRT.  First, you are allowed a current income tax deduction for the present value of the interest that will ultimately pass to the charity if the transfer to the CRT is made during your lifetime.  Second, since the trust qualifies as a charitable trust, income realized by the trust is tax free.  However, income distributed out of the trust to a non-charitable beneficiary will be taxed at the beneficiary’s normal tax rates.  And finally, capital gains realized on the sale of appreciated assets during the trust term are deferred as long as they continue to be held in the trust.

The CRT also provides gift tax savings because all gifts made to qualified charities are exempt form gift tax.  Therefore, a lifetime gift of a charitable remainder interest in a CRT is exempt from gift tax, regardless of the value of the gift.  Moreover, the CRT can reduce estate taxes because the value of property (previously transferred to the CRT) as of the date of your death is generally deductible from your estate.  This reduces the taxable portion of you estate and, therefore, the overall estate tax.

Life Insurance

One way to provide for heirs while still benefiting charity is to combine a CRT with the purchase of life insurance.  When you receive the annuity from the charitable remainder trust each year, you can use all or a portion of the annuity to make gifts to an irrevocable life insurance trust, which then purchases life insurance.  You can keep the life insurance out of your estate if the trust is appropriately drafted and certain formalities are followed.  At the same time, you can replace a portion of the property going to the charity by making your heirs the beneficiaries of the policy. 

Conclusion

A CRT is an effective tool that you may implement under appropriate circumstances not only to benefit charity, but to reduce income, gift, and estate taxes.  It will also provide a tax-deferred income stream.  Please contact us to consider whether  a CRT is appropriate for your circumstances.

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