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Bill, Enrolled Agent
Category: Tax
Satisfied Customers: 3123
Experience:  EA, CEBS - 35 years experience providing financial advice
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I am currently working on a revocable trust. I am ...

Resolved Question:

I am currently working on a revocable trust. I am confused as to what should be "included". My home (of course), but what about life insurance, pensions, IRA,403b, should the benificiary of these be the trust? What is the advantage/disadvantage??
Submitted: 7 years ago.
Category: Tax
Expert:  Bill replied 7 years ago.

Pensions, IRAs, and 403(b)s cannot be placed in a trust (these plans avoid probate if there are individuals designated as beneficiaries rather than the estate). However, it is possible to designate a trust as the beneficiary of these plans. Generally, this is only advantageous in certain circumstances (such as managing assets for a disabled adult child, as a credit shelter trust for a surviving spouse to reduce estate taxes and there are limited nonretirement plan assets to fund the trust, etc.). Usually, designating individuals as beneficiaries of retirement plans is more efficient and provides more flexibility.

Life insurance also avoids probate if individuals are designated as beneficiaries. However, if you are the owner of the insurance policy and have other rights (referred to as incidents of ownership), then the policy will be included in your estate for estate tax purposes. If your estate will not be subject to federal estate taxes (by including the value of the policy) or even close to the limits then it is not necessary to change the ownership. In 2008, $2,000,000 is exempt from federal estate taxes and in 2009 $3,500,000 is exempt.

Customer: replied 7 years ago.
Reply to Bill's Post: Thanks, XXXXX XXXXX still somewhat confused. If the only asset in the trust is the property...what is the true benifit of having one? I was hoping to make things easier for my son by having everything in the trust and naming him as the successor trustee. What "flexability" would he have in regards XXXXX XXXXX retirement plans? Also, I can't imagine my estate being over 3 million so does that mean he will not have to pay federal estate tax?
Thanks so much...I'm really having difficulty with this!
Expert:  Bill replied 7 years ago.

The primary reasons that a revocable trust is used is to avoid the time of expense of probate, avoid publicity (a will is public information), and to appoint a successor trustee to manage your assets if you become incapacitated. The life insurance and retirement plans avoid probate if your son is the designated beneficiary. As the beneficiary of different types of retirement plans the amount of flexibility he will have regarding taking distributions will depend somewhat on the provisions of the plans. For the pension plans you may want to check with the plan sponsors to see what his distribution options will be (lump sum, life expectancy payments, period certain, etc.). For the IRA account, your son's options will depend on your age at death but generally he will be able to spread the distributions over his life expectancy (he can also accelerate these distributions once they begin). The options on the 403(b) plan will be similar to the IRA unless the plan's provisions state otherwise. He will only have to pay income taxes on the distributions when they are withdrawn from the plans.

Regarding federal estate taxes, if you pass away this year and the value of your gross estate is less than $2,000,000 then there will be no federal estate taxes due. If the value of your gross estate was $2,500,000, then there would be federal estate taxes due on $500,000.


Bill, Enrolled Agent
Category: Tax
Satisfied Customers: 3123
Experience: EA, CEBS - 35 years experience providing financial advice
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