Fear can be a very motivational. It’s what causes us to build storm shelters in our basements and rent safety deposit boxes at banks to protect our most precious belongings. Sometimes it is this same kind of fear that causes a doctor to start looking at setting up a trust for their family. Rightfully so, they want to protect all of the assets they have worked most of their life to acquire. But what kind of trust do you need in order to properly protect those assets? Will a safety deposit box work, or do you need to buy the entire bank?
In order to determine if a trust is even worth setting up you must first establish what your motives are. Are you trying to protect your assets? Are you trying to establish how assets will be transferred after death? Are you trying to minimize the tax liability of your estate? Are you concerned about privacy? All of these are questions whose answers will determine if a trust is needed, and if it is, what type of trust you will want to establish. Below are some of the most common types of estate planning options we see with our doctors.
- Will – This option is much less expensive then setting up a trust and can provide direction on how assets will be distributed after death. However, having a will established will not avoid the possibility that an estate goes through probate. Probate is the legal process whereby a court oversees the distribution of assets and pays the debts and claims of the decedent. This process is typically needed for all assets that do not legally transfer ownership upon passing away. Many who are looking to estate plan want to avoid the probate process since it can be very long and expensive. Also, the contents of a will are usually made public, so if you are looking to maintain privacy a trust may be a better option.
- Revocable Trust – This is a very common type of trust which in many ways acts in a similar manner to a will. The advantages of a revocable trust is that it helps avoid an estate going through the probate process and it also keeps the estate’s information private. A Revocable Trust is typically longer and more complicated than a will due to the detailed instructions it gives on how property is supposed to be managed and distributed. For example, all assets included in a trust must be titled in the trust’s name. Due to this additional level of complexity the cost for establishing a revocable trust is significantly higher than creating a will. Like a will, this type of trust can be altered as time goes on and can be dissolved if desired.
- Irrevocable Trust – This type of trust is similar to a revocable living trust in that it has detailed instructions on how assets are supposed to be managed. However, when this trust is established, it cannot be changed without permission of the beneficiary of the trust. One of the main benefits of establishing an irrevocable trust is that is can help minimize the tax liability of the overall estate. By making the trust irrevocable, it basically establishes a separate legal entity (much like a business), which will pay its own taxes and file its own tax return. Again, this added layer of complexity will usually increase the cost of running this type of trust. The most common form of an Irrevocable Trust is an Irrevocable Life Insurance Trust, which is funded with gifts to the beneficiaries. This type of trust provides a means of avoiding estate taxes on life insurance proceeds.
It should be noted that an attorney familiar with estate planning should be consulted before making any decisions about the creation of a trust. Each person’s situation and motives will be different, so the type of estate planning needed will differ as well.
Lastly, there is another type of trust which you will sometimes see in the dental/medical world, the offshore or foreign trust. This type of trust is formed using the legal system of a foreign country and is usually created for two reasons. The first being asset protection. By having the trust under the jurisdiction of a foreign country it makes it harder for creditors or other persons to go after the assets in the trust. The second reason foreign trusts are established is for tax evasion, which is illegal. Since there are usually no reporting requirements between foreign countries and the United States, some have used these trusts in the past to hide income from Uncle Sam. For this reason alone, the IRS pays special attention to these types of trusts and demands additional reporting requirements above and beyond a domestic trust. Creating one of these trusts is similar to waving a red flag at the IRS and yelling “Look at me!” Failure to meet the additional filing requirements can result in considerable penalties. The costs of running this type of trust can be very significant and in the end hard to justify. There would be very few situations where this type of trust would make sense over a traditional domestic trust.
In most cases the desires to protect assets and establish how they are distributed can be met with a will and or a domestic trust. However if you have any questions about your specific situation please give us a call.