Using the Power of Trusts to Spur Your Estate Planning


Volume 1 • Issue 3 • July 2011

The Counselor is a monthly newsletter of Hallock & Hallock dedicated to providing useful information on estate planning, business succession planning an charitable planning issues. This month's issue will discuss what people want in their estate planning and how the power of trusts can help you achieve your estate planning needs and desires. If you are interested in learning more about the ideas and processes discussed in this newsletter, please contact us for an initial consultation.

As you have probably heard by now, estate planning changed again on January 1, 2011. The federal estate tax exemption increased to $5 million ($10 million for a married couple with proper planning). As a result, most people are not affected by the federal estate tax, for now. I say "for now" because the new law is set to expire on December 31, 2013. Some may have taken this change as a signal that there was no longer a need to do any estate planning. Of course, this couldn't be further from the truth. Even if the new law is ultimately extended, most of the reasons families need/want to plan their estates have always been unrelated to estate taxes.

What Do People Want from Estate Planning?

Most of us have needs and desires for ourselves and our loved ones that are timeless and that no Congress can ever legislate away. See how many of these apply to you.

For Ourselves: Protection and Control. We want control over our assets and health care decisions. We want financial security. We want to be protected from the risks of life, which include unjust lawsuits, disability, and the cost of long-term care. Some of us have philanthropic goals, too.

For Our Surviving Spouse: Financial Security. We want to know that our surviving spouse will be financially secure and will be protected from taxes, primarily from income tax.

For Our Children and Grandchildren: An Education and Financial Security, including Asset Protection from Immaturity, Divorce and Lawsuits. We also want to know that assets that are not needed by our surviving spouse will go to our children, not to a new spouse and then his or her children. We want our descendants to live successful lives that include a strong work ethic, integrity, faith, and appreciation and respect for other family members. Above all, we want our family members to love each other, spend time together and avoid conflict. We do not want them to be harmed by the wealth or property that is left to them.

For Our Business: Attract and keep quality talent and preserve the value we have built up through our hard work. Building a business, whether it is a store, manufacturer, or agricultural operation, is hard work. We don't want that work to have been wasted. We want our business to pass to family members who want to own and operate it, while treating non-participating family members fairly, or we want to sell it to employees or outsiders for a fair price.

The Consequences of Not Planning

Each of these needs and desires requires proper planning to achieve. They will not just happen because you want them to. If you do not plan, you and your family will be under the default plan established by your state's legislature. Sad experience tells us that it probably will not be what you would want. This is particularly true in blended families.

The simple truth is this: to meet your needs and realize your desires you must take the time both to plan and to put that plan in place.

How to Find the Right Professionals to Help You

Instead of looking for someone who will sell you a will, a living trust or an insurance policy, look for professionals who are interested in developing a relationship with you, your family and your business. They are not just selling you a product and then moving on. You will be best served by working with a team of professionals: an experienced estate planning attorney, an accountant, a financial advisor and/or insurance agent, possibly even a planned giving professional. This team will be able to provide thoughtful solutions to your needs from a variety of perspectives, coming up with a cohesive plan that will best suit your needs and goals. Start with a trusted advisor and ask for recommendations for others who could be brought onto your team.

Harnessing the Power of Trusts in Your Planning

Trusts are powerful tools that can be used to achieve specific estate planning goals. Here are some ideas that will work for most people, regardless of the size of your estate.

Idea #1: Keep Assets in Trust

Holding assets in trust is good for you, for your surviving spouse, and for your children and your grandchildren. Assets kept in a trust can be protected from potential predators, remarriage of the surviving spouse, irresponsible spending, creditors, divorce, etc. Assets in a trust can also provide for a loved one with special needs, without losing valuable government benefits.

Idea #2: Think Differently about Your IRA and Other Tax-Qualified Plans

Most people want to maximize the stretch out of an IRA and keep the tax-deferred growth going for as long as possible, but don't know how best to do it. There is a way to use a special trust to maximize stretch out and provide long-term divorce and lawsuit protection.

Step 1: Leave your IRA to a retirement plan trust for the benefit of younger generation family members (children or grandchildren). The young age will provide the maximum stretch out and the trust will provide them protection from losing it in a divorce or to creditors. An outside trustee can prevent a beneficiary from "cashing out early" and preserve the intended stretch out.

Step 2: Use the required minimum distributions you must take from this IRA to purchase life insurance on your life. But do it through an Irrevocable Wealth Replacement Trust that will benefit your surviving spouse. When you die, your surviving spouse will have lifetime access to the proceeds in the trust. This can be a much better deal for your surviving spouse than inheriting the IRA because the distributions from the IRA will be subject to income tax, while the proceeds from the life insurance in the trust will be tax-free. The trust design will provide for successor beneficiaries if your spouse dies before you.

Charitable Variation: Alternatively, you can make a charity or religious group the beneficiary of the IRA, and it will receive the proceeds tax-free. Again, use the required minimum distributions while you are living to purchase life insurance through an irrevocable trust that will benefit your surviving spouse.

Idea #3: Use the $5 Million Gift Tax Exemption NowIn the new tax law, Congress has, at least temporarily, increased the gift tax exemption to $5 million ($10 million for married couples). We may have this through 2012, but it could disappear even sooner as Congress begins to focus on how to raise revenue and cut spending. If you have a substantial estate, you can use this exemption to move assets and future appreciation out of your estate now in the likely event that a lower estate tax exemption returns.

For example, you could use the $5 million gift tax exemption to fund a large life insurance policy in an irrevocable trust that can build up cash value for a supplemental retirement fund or provide an alternative financial investment. A second-to-die policy to pre-fund estate taxes could also be purchased. The $5 million exemption can also be used to fund other "advanced" planning options.

Idea #4: Use Trusts to Create a Non-Financial Legacy

Creating a non-financial legacy can be quite powerful. You can write your motivations for the planning and explain discretionary guidelines. If there is heirloom property that is sentimental or historical, you can provide a handwritten note with a story or significance of the item(s).

After your trust has been signed and your plan put in place, we can arrange for a family meeting: in person for those who live in the area and/or via Skype for out-of-towners. We can talk about the planning that has been done and why. This is good for your beneficiaries, as it brings them into the process and helps them understand your motivations, the planning and your intended results.


The new tax law has definitely not changed the need for each of us to make and implement an estate plan. The power of trusts can be a big motivator and can help you achieve your goals. At Hallock & Hallock we can help you understand where you are now, put together a team of qualified professionals that includes your current advisors, help you determine your needs and goals, work with you to create the plan you want and need, and help you put your plan in place.

We are grateful you have allowed us to work with you in the past and hope to continue that relationship into the future. Thank you!

This Newsletter is for informational purposes only and not for the purpose of providing legal advice. You should contact an attorney to obtain advice with respect to any particular issue or problem. Nothing herein creates an attorney-client relationship between Hallock & Hallock and the reader.