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Trusts are not just for the Wealthy!

TROY, Michigan - April 27, 2004 - Contrary to what many people think, trusts are not reserved for the wealthy. The truth is, people from all walks of life may benefit from a trust.

What Is a Trust?

Generally speaking, a trust is a legal entity that is central to a three-part agreement in which the owner of an asset - the trust's "grantor" - transfers the legal title of that asset to a trust for the purpose of benefiting one or more beneficiaries. The trust is then managed by one or more trustees. Trusts may be revocable or irrevocable and may be included in a will to take effect at death.

Revocable trusts can be changed or revoked at any time. For this reason, the IRS considers any trust assets to still be included in the grantor's taxable estate. This also means that the grantor must pay income taxes on revenue generated by the trust and possibly estate taxes on those assets remaining after his or her death.

Irrevocable trusts cannot be changed once they are executed. The assets placed into an irrevocable trust are permanently removed from a grantor's estate and transferred to the trust. Income and capital gains taxes on assets in the trust are paid by the trust. Upon a grantor's death, the assets in the trust are not considered part of the estate and are therefore not subject to estate taxes.

The trust's grantor names a trustee to handle investments and manage trust assets. The grantor can work with the trustee on major decisions, or the trustee can be assigned full authority to act on the grantor's behalf.

A trustee may be an entity that offers experience in such areas as estate tax law and money management or it may be an individual such as an attorney or accountant. Trustees have a responsibility - known as "fiduciary responsibility" - to act in the grantor's best interest.

Understanding the Role of a Trust

Although trusts can be used in many ways, they are most commonly used to:

• Control assets and provide security for both the grantor and the beneficiaries
• Provide for beneficiaries who are minors or require assistance managing money
• Avoid estate or income taxes
• Provide expert management of estates
• Avoid probate expenses
• Maintain privacy
• Protect real estate holdings or a business

Different kinds of trusts are designed to meet different needs and objectives. For example, if your primary goal is to ensure privacy in the settlement of your estate or to centralize control of assets, you might choose a living trust. A living trust allows you to remain both the trustee and the beneficiary of the trust while you're alive. You maintain control of the assets and receive all income and benefits. Upon your death, a designated successor trustee manages and/or distributes the remaining assets according to the terms set in the trust, avoiding the probate process.

As another example, an irrevocable life insurance trust (ILIT) is often used as an estate tax funding mechanism. Under this trust, you make gifts to an irrevocable trust, which in turn uses those gifts to purchase a life insurance policy for you. Upon your death, the policy's death benefit proceeds are payable to the trust, which in turn provides tax-free cash to help beneficiaries meet estate tax obligations.

If you want to leave money to your grandchildren, you might consider a generation-skipping trust. This trust can help preserve your $1,500,000 generation-skipping transfer tax exemption (for 2004) on bequests to your grandchildren and avoid the tax on bequests exceeding that amount, which can be up to 48%.

These are just a few examples of the many types of trusts. Although not quite as popular as wills, trusts are becoming more widely used among Americans, wealthy or not. Increasing numbers of people are discovering the potential benefits of a trust - how they can help protect assets, reduce tax obligations, and define the management of assets according to their wishes in a private, effective way.

This article is not intended to provide specific advice or recommendations for any individual. Consult me, your financial advisor with questions.

Securities Offered Through Linsco/Private Ledger, Member NASD/SIPC

Groen, Kluka & Company, P.C., a professional accounting, management consulting and wealth management services firm, was founded in 1984 and serves a wide range of clients throughout southeastern Michigan. The company is a member of the American Institute of CPAs (AICPA), the Michigan Association of CPAs (MACPA), and CPA Associates International (CPAAI) as well as several local and state community and industry-related associations.