Trusts And Estate Planning Service
In Phoenix, Arizona

Estate Planning

Having a comprehensive estate plan in place will help you feel more confident about the future and can help you achieve various goals and objectives, including: 

1. Provides support and financial stability for your loved ones.
2. Preserves assets for future generations.
3. Minimizing taxes and expenses.
4. Ensuring all of your assets would be distributed according to your wishes.
5. In the event of your incapacity to make decisions, a trust may ensure that your chosen individual will make the decision on your behalf. 

Aside from asset protection, using a trust will also benefit you with generational planning, it may ensure effective management of assets, and provides benefits for income tax and estate tax purposes. 

Common Types of Trusts

• Revocable trust – Also called the living trust, revocable trusts are made during the lifetime of the trustor and can be revoked or modified entirely. Revocable trusts are trusts that can be changed by their owner anytime. Meaning, beneficiaries can be changed or removed by the trusts’ owner, designate new owners, and modify stipulations as to how an asset within the trust is managed at any time the trustor wishes. 

• Irrevocable trust – In contrast to a revocable trust, an irrevocable trust is a trust that can not be changed, revoked, or modified once an asset is transferred to an irrevocable trust. Not even the trust maker can take an asset out of an irrevocable trust. 

• Asset protection trust – Asset protection trust (APT) is an irrevocable special type of trust that is mainly used to shield an estate and assets from creditors. The asset protection trust would own the asset in question or the asset is no longer owned by the trustor and would be managed by the trustee. In that way, it will effectively remove almost all possibilities of creditors being able to gain access to an estate through a judgment or lien.

• Charitable trust – Charitable trusts are trusts that are created to protect an asset for charitable purposes according to the trust deed or an agreed set of rules.

• Constructive trust – A Constructive trust is an implied trust without a trustee. This type of trust is used to right a wrong, relating to an individual’s asset. 

• Special needs trust -There are two common types of special needs trust (SNT), commonly designated as first-party and third-party special needs trusts. A special needs trust is mainly to provide support and assistance to a disabled beneficiary. SNT covers the percentage of the disabled beneficiary’s financial needs that are not covered by public assistance payments. 

• Spendthrift trust – This type of trust is made by a grantor to limit the beneficiary’s access to a trust principal. The spendthrift trust is often made to ensure that the trust property benefits the beneficiary without worrying about the beneficiary not using the property wisely or getting trouble from creditors.

• Tax by-pass trust – A bypass trust is a legal arrangement trust mainly to benefit married couples to avoid estate tax on a certain transfer of assets when one spouse passes away.

• Totten trust – A Totten trust is a revocable trust that is created during a grantor’s lifetime. A Totten trust is primarily associated with financial institutions’ savings accounts, bank accounts, and certificates of deposit. The trustor shall deposit money to an account in his name as the trustee for another. 

Estates and Trusts Tax Implications 

Depending on the trust, the tax implication can go from simple to complex. Trusts are made to provide security for your loved ones and to preserve assets. But before deciding on what trusts are best for your goals and needs, having a basic understanding of these trusts and the possible tax implications are also important to prevent future headaches for your beneficiaries. 

While lawyers are important for estate planning, tax accountants play a critical role along the process as well. Accountants bring a wealth of tax knowledge to the taxation planning equation. And, provide advice on the tax implications of your decision-making for your estate. Accountants are so much more than the “tax guys”, they are your financial partners. 

• Transfer taxes. This implies when an asset is transferred to another either by gift during life or by a bequest at death.

• Income taxation of trusts. Property under a trust that generates income is taxed depending on who receives the income.

1. Income retained by the trust–Generally, trusts are “pass-through entities.” This means that trust income retained by the trust is taxed to the trust (but not if it is a charitable remainder trust), while distributed income is taxed to the beneficiary who receives it. In general, trusts are taxed like individuals for income tax purposes. General tax principles that apply to individuals also apply to trusts. A trust may earn tax-exempt income and may deduct expenses. Trusts are also allowed a small exemption.
2. Income distributed to beneficiaries–Income distributed by a trust is taxed to the beneficiary who receives it. The income is “passed through” on Federal Form 1041, Schedule K-1 (Beneficiary’s Share of Income, Deductions, Credits, etc.). The beneficiary must report his or her share of the trust’s taxable income on his or her personal income tax return (Federal Form 1040). 
3. Retained interest trusts–Trust income is taxable to the grantor or powerholder if the grantor has retained an interest in the trust (e.g., right of revocation) or if some other person is given a general power of appointment over the trust income or principal. Income taxable to the grantor or powerholder is not reported on Federal Form 1041; rather, it is reported on the grantor or power holder’s personal income tax return (Federal Form 1040). Then, either a copy of Federal Form 1040 is attached to a blank Federal Form 1041, or, in some circumstances, no Federal Form 1041 is filed at all.

• Income taxation of estates. An estate may receive or earn income. How it is taxed depends on the nature of the income. 

• Income earned prior to death. If a decedent was a cash method taxpayer, income received (actually or constructively) by the decedent prior to death is reported on the decedent’s final 1040.

If the decedent was an accrual taxpayer, income accrued prior to death is reported on the final 1040. Income earned by the taxpayer but not paid before death is reported on the income tax return of the recipient of the income. This is called income in respect of the decedent (IRD). Examples of IRD include uncollected wages, accrued interest on bank accounts, and dividends declared but not collected. If the recipient of IRD is the decedent’s estate, it is reported on Federal Form.