BENEFICIARYIn some trusts, the same individual can be creator, trustee, and beneficiary. Thus, he or she has complete control and benefit of the assets, even while the assets are owned by the trust. Even if the creator can't fill all the roles, the trustee and the beneficiary frequently are one and the same. If it is of primary intent to use the trust as a protector of assets; it is best if all positions are NOT filled by the same person.
CHOOSE BENEFICIARIES NOW, CHANGE AS DESIREDThe equity, value, or distributions from the trust will benefit the beneficiary. There can be different types of beneficiaries. For instance, income could go to one person for any period of time; and principal could be distributed differently. Beneficiaries could be limited to the benefit for only their life. That would mean that their families (heirs) would not have any rights to any inherited benefits. You could name some of them as remainder beneficiaries anyway. That's the good news. Your choice, your way. Many trusts have "remaindermen" or remainder beneficiaries, who'll receive the trust assets after the trust terminates, or after some of the other beneficiaries are gone. The income beneficiaries and the remainder beneficiaries may be, but don't have to be the same.
SELECTING THE BENEFICIARY(s)The main thing to remember is that a Trustee has power, whereas, a beneficiary (in their capacity as beneficiary) has no power. In fact, the reason for any attacks by tax authorities or claims against individuals named as beneficiaries, are usually attempting to determine if you mistakenly gave "power" to the beneficiary; thereby eroding separation and protection of assets held in trust.
You can see that the main benefit is to select a method to provide for your beneficiary. Usually, it is your intent to use and enjoy the assets for your lifetime, and then your children. This intent is called a "Life Benefit". This Life Benefit intent usually extends to your spouse. The Trustee can also be a beneficiary.
Can you be a Trustee AND a Beneficiary? Sometimes, especially if you set up a revocable trust. However, with most irrevocable trusts, where you want tax and asset protection advantages, you should name someone else as trustee, to establish separation of control. Moreover, even if you act as trustee of your own revocable trust, you'll need to name a successor trustee, in the event the original trustee becomes unable to serve.
NAMING BENEFICIARIES ACCORDING TO THEIR NEEDSEven if you decide to give away some assets, to whom would you give them? To the child who already has a family and a promising career, to the emotionally disturbed child who is likely to have lifelong problems, or to the child who is still too young to assess? And once you give away assets, how can you be sure they'll be well conserved?
If you anticipate an estate-tax obligation, you're often told to reduce your estate by giving away assets during your lifetime. But real life situations aren't always so clear-cut. Suppose you expect to leave a sizable estate but you're not sure that you--and your spouse--will have enough to live on if you give money away now. Naturally, you'll be reluctant to part with assets you might need later.
You can resolve such problems with an irrevocable sprinkle trust.
The first steps are to establish the trust and fund it. You can transfer up to $600,000 worth of assets to a sprinkle trust free of gift tax. If your spouse goes along with the gift, you can shift up to $1.2 million, tax-free.
These trusts can preserve assets for yourself and your spouse, in addition to your children and grandchildren. They enable you to provide for each family member, according to his or her needs, while avoiding gift and estate tax.
Observation: Making large gifts will cut into or use up your $600,000 exemption from estate taxes. However, using this exemption now, while it's still valid, may be a good idea: As Washington sniffs around for new sources of tax revenue, this exemption could be trimmed at any time.
You can name a number of trust beneficiaries, including your spouse, your children and your grandchildren. No beneficiary is entitled to trust income, as a matter of right. Instead, distribution of trust income and principal is entirely at the discretion of the trustee.
Once assets are shifted to an irrevocable trust, they're out of your taxable estate. If you transfer assets that may appreciate (stocks, real estate), any future growth also is out of your estate. Of course, "irrevocable" means that you can't change your mind. Once you make the transfer, the assets no longer belong to you.
The key to an effective sprinkle trust, then, is the selection of a good trustee or trustees. You or your spouse can't be trustees and neither can a child or a grandchild. You may choose an in-law, a friend, a professional advisor an institutional trustee. A trustee must have absolute integrity, common sense and a knowledge of your family circumstances.
Recommendation: When choosing co-trustees, try to pick people who are compatible, so deadlocks can be avoided. Include a provision for selecting successor trustees in case the original trustees die or resign.
Once assets are transferred to the trust, the trustee runs the show. He or she has a broad latitude in distributing trust assets to the beneficiaries. The trustee might, for example, distribute money to your son toward a down payment on a house or to finance your granddaughter's private schooling. If your daughter needs special medical care, the trustee can provide the necessary money. If your own fortune suffers a reversal and you run short of retirement income, the trustee can distribute funds to your spouse.
If you have the right trustee, a sprinkle trust gives you the best of all worlds. You avoid gift and estate taxes, you provide for your family's future needs and you have a prudent trustee (who is legally required to act responsibly) rather than your family members handling the assets.
Observation: The consensus among experienced attorneys is that it is not a good idea to let the trustee make distributions directly to you, the grantor. If the trust documents forbid the trustee to make distributions to you, you avoid any incidents of ownership, and thus deter attempts by the IRS to try to pull the trust assets back into your estate after your death.
There may be income tax advantages as well. Say you have a $400,000 securities portfolio, throwing off $15,000 a year in taxable income. In your possession, that $15,000 is added to all of your other income and taxed at 30% to 40%, including state and local taxes. Your trustee, though, may be distributing the funds to lower-bracket recipients. Example: Your grandson is in college. Money needed for education might be distributed directly to your grandson, rather than to your daughter and son-in-law, who are probably in a higher tax bracket. Moreover, the trust itself has a tax bracket, which means a surplus (income minus distributions) may be taxed at only 15% or 28%.