Twenty Questions about Elder Planning: How to Prepare for a Secure Financial Future

By Karl, Peter A., III | The CPA Journal, May 2004 | Go to article overview

Twenty Questions about Elder Planning: How to Prepare for a Secure Financial Future


Karl, Peter A., III, The CPA Journal


Elder planning is complex and emotional, with issues in the areas of estate taxes, IRAs and other retirement-based investments, long-term care insurance (LTCI), and the range of trust instruments available. Well-informed choices allow individuals to control their financial circumstances and fund them better than would otherwise be possible. The financial future of the growing number of seniors in the United States requires nothing less.

1. What determines whether an estate plan should encompass a revocable living trust (RLT) or a last will and testament (LWT)?

Using an RLT accomplishes "living probate" in which assets are retitled following the execution of the trust documentation. An RLT avoids the expense and delay associated with probate, which is the process of retitling assets from the name of the decedent to the beneficiaries named in the LWT. Consider the following when deciding which format to use:

* When an individual owns real estate located in more than one state, usually an RLT can avoid ancillary or another probate procedure in the second state. The more varied and substantial the asset holdings, the more costly the estate administration will be (it can be completely avoided with an RLT).

* If a will contest by a family member is anticipated, using an RLT is recommended because it does not provide heirs an opportunity to dispute the will through the probate process. The contesting party would have to file a lawsuit on the basis of contract law, which procedurally is a more difficult task than contesting an LWT. Additionally, there is a presumption of validity with respect to a trust; the person disputing the trust has the burden of rebutting its validity.

* An RLT is not required to be filed in court (unless there is a rare judicial challenge). Consequently, the trust and its accompanying assets are not a matter of public record.

A "pour-over" will is always needed in conjunction with an RLT to address those assets that have not been previously retitled to the name of the trust (e.g., an inheritance received immediately prior to death).

2. When is an irrevocable living trust (ILT) useful in elder planning?

An ILT is an alternative to the outright distribution of property to a beneficiary for reasons such as

* a concern over the windfall nature of an outright transfer to the beneficiary who (because of age or other circumstances) warrants asset preservation through entity insulation and needs to have the future distribution of the BLT assets controlled;

* a transfer of the income tax burden from the creator of the trust to its beneficiaries age 14 or older (provided student financial aid implications are reviewed). This assumes that the ILT is not an accumulation trust but a conduit one;

* freezing the value of assets to save estate and generation-skipping taxes (e.g., by using a dynasty trust); or

* elimination of estate taxation attributable to life insurance proceeds.

3. What is the benefit of using a split interest trust (SIT)?

The most widely used SITs (even by individuals in their 70s and 80s) are the grantor retained annuity trust (GRAT), the grantor retained unitrust (GRUT), the qualified personal residence trust (QPRT), and the personal residence trust (PRT).

A SIT provides benefits to the creators of the trust for a stated period of time. If the grantor lives beyond the designated term, none of the assets within the trust are included in the individual's estate as long as the trust qualifies under IRC section 2702. The GRAT stipulates the right to receive a fixed payment of income, while the amount distributed by a GRUT is based on a fixed percentage of the trust's value, determined annually. The QPRT retains occupancy of the principal residence for the trust grantor during a stated term. A second or vacation home can be used within a PRT with provisions addressing usage, expense sharing, and death of a beneficiary. …

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