Trusts aren’t just for Estate Planning of the super wealthy anymore. IRS statistics show that the average trust has about $250,000 in it, not exactly Rockefeller territory. That’s because many people have learned that trusts can be useful for even middle class families.
One way to use a trust is to build a legacy that will last for a couple of generations or more. This is the legacy trust, made famous by longstanding family fortunes such as Rockefeller, Kennedy, Hearst, and Pulitzer. You can set one up, too, and it won’t take as much money as you think.
The typical legacy trust pays out only income to the current beneficiaries and preserves the trust principal to generate income for future generations. State laws might limit how long the trust can last (unless the trust is set up in a few states such as Delaware, Alaska, and Idaho that have no limits). But even then you can count on being allowed 100 years or so before the trust has to be terminated.
Congress decided it didn’t really like legacy trustsas an estate planning strategy, so it created the generation skipping transfer tax. This tax provides that if a gift is made directly from a grandparent to grandchild, skipping the generation inbetween, then the GSTT is imposed to ensure that the government doesn’t miss a generation’s worth of estate taxes. The maximum estate tax rate of 55% is imposed on the entire generation-skipping gift.
But each individual has a $1 million exemption from the GSTT. That means a married couple can give up to $2 million directly to the grandchildren’s or subsequent generations without paying the GSTT. You’ll still owe regular gift taxes when money or property is put into the legacy trust.
The best estate planning strategy to set up a legacy trust is to put assets into it that are likely to appreciate as time goes on and that you want to retain in the family. That way you pay gift taxes at today’s value. The future appreciation is out of your estate, and also out of the estates of the subsequent generations. The only taxes paid are those on income and capital gains.
A vacation home is a good candidate for a legacy trust. Future generations might not get income from it, but they will be able to use it. An investment portfolio also works well in a legacy trust.
But perhaps the best way to create a legacy trust is with life insurance. This will allow your gift to future generations far more rapidly than any other gift you can make. You set up the trust and empower the trustee to take out a life insurance policy on your life and your spouse’s. The trustee takes out a survivorship policy that pays off only after both of you have died. Each year, you make a gift of cash to the trust to pay the premiums. The gift is tax free in most cases, or there might be an annual gift tax if the premiums or high or you have only one or two beneficiaries.
A survivorship, or joint life, policy is the cheapest way to buy a lot of permanent life insurance, so you’ll want to use this type of policy if you can. These policies also have a great return. A couple with each spouse age 65 often can get a policy that pays four times or more in benefits what they are likely to pay in premiums during their lifetimes.
The advantage of using a legacy trust as part of the estate planning strategy is that it lets you benefit more than one generation with reasonable certainty that the first generation won’t waste or squander the principal. The trust also protects the principal from the estate taxes and creditors of each generation. You’ll need to pick a bank or trust company as trustee, to ensure that the trustee will be around for a while.
It doesn’t take a lot to set up a legacy trust. While they are promoted to individuals with many millions, you can use one, too. If you have some assets you don’t need that are likely to appreciate, or if you have enough income to fund the insurance premiums. your heirs might appreciate the benefits of a legacy trust.