Types of Trusts Part Two: Testamentary Trusts

In a prior blog, I discussed trusts that can be established in a grantor’s lifetime. In this blog, I’ll discuss trusts which are established after the grantor dies: a testamentary trust. These trusts take their name from the fact that they are established by the grantor’s Last Will and Testament. The purposes of these trusts are to prevent a beneficiary from squandering their inheritance as well to make sure the beneficiary has access to the funds for reasons that the grantors specifies (like education or health care needs).

Choosing a trustee for a testamentary trust can be a tricky thing. Because they only come into existence after the grantor dies, the Will should specify who will act as trustee. Although our clients sometimes want family members to be trustee we recommend that they chose a financial institution (bank’s trust department) to act as trustee for several reasons:

  • Banks often have greater access to investments to increase the value of the trust than family members;
  • Banks often have greater financial expertise than family members;
  • Banks have insurance and bonding in place in the event there are problems in the administration of the trust;
  • In the event there is a disagreement between the beneficiary/beneficiaries and the Banks, there will still be harmony in the family (the children of a child are not mad at their Uncle).

As indicated above, a primary reason for establishing a testamentary trust is to protect/preserve a bequest until a beneficiary is capable of using good judgment. Accordingly, the beneficiaries are normally described by age. Example: if any beneficiary is under the age of 30 their share will be held in trust.

Until they reach the specified age(s) of distribution, the trustee is charged with investing the assets and spending the assets on behalf of the beneficiary in ways specified by the deceased grantor. Example: the Trustee shall expend such sums from the principal or income from the trust as shall be necessary to pay for the education, health care needs, and reasonable living expenses. This raises difficult questions and drafting problems. How much discretion should a trustee be authorized to exercise? Stated alternately, how should a testamentary trust be drafted so that it is unduly restrictive but provides sufficient guidance for the exercise of the trustee’s authority?  We attempt to ameliorate this problem by including a set of “principles” to provide direction to the trustee.

To quote the poet, sage and philosopher, the late, great, George Harrison: “all things must pass.” In the current context, this means that at some point the trust must terminate and distribute the principal to its beneficiary(ies). This can be any age, or any set of conditions. We recommend that there be at least two distributions at least several years apart. This allows a beneficiary to “mature” and/ or recover from a previous lapse of judgment.

Although testamentary trusts are often used to preserve a bequest for an underage/inexperienced beneficiary, it is also common for a testamentary trust to be established to protect a bequest to a surviving spouse. In these marital testamentary trusts, the surviving spouse receives all of the income of the trust for their life (distributed at least annually), and the right to distribution of principal in the event of need (health care, maintain standard of living), but any principal remaining at the surviving spouse’s death goes to the children.

We normally include a testamentary trust in every Will we draft for our clients. Jason Bourne, who created so many (fictional) widows and underage beneficiaries, wouldn’t need a testamentary trust, but if you have a “real life” spouse and/or children you should consider including a testamentary trust in your Will.

If you, or someone you know, are in need of legal services regarding estate planning please feel free to contact the Kreamer Law Firm, P.C. through our website or by calling 515-727-0900.

Types of Trusts Part One: Living Trusts

In the previous post, I described how trusts can be part of everyone’s estate planning (besides Jason Bourne). There are essentially two types of trusts: living trusts and testamentary trusts. In this post I’ll provide you with some information about certain types of living trusts.

Living trusts (also called inter-vivos trusts) are set up during the grantor’s lifetime. They can be either revocable (changeable by grantor) or irrevocable (cannot be changed by grantor).

The following are some examples of living trusts:

Revocable Trusts are a popular probate avoidance device. The grantor is the individual who contributes the assets to the trust, is the trustee, and the beneficiary of the trust during their lifetime. The terms of the trust directs the disposition of the assets of the trust after the grantor dies. The grantor reserves the right to amend or revoke the trust at any time. Because of the extensive controls and rights of the grantor, they are ignored for both income and estate tax purposes (i.e. they do not save or avoid any income taxes or estate taxes which the grantor would otherwise pay). The key advantage to these trusts are: (i) that the assets of the trust are not subject to the probate process or its attendant fees and costs; and (ii) they are “private” in that there is no requirement to file them with the Court when the grantor dies. Even if a grantor establishes a revocable trust they should still have a Will so that any of the assets which the grantor did not previously transfer to the trust would become part of the trust aftert the grantor’s death.

Irrevocable life insurance trusts (ILIT) can be established to remove the proceeds of life insurance from your taxable estate. Once established, an ILIT is generally not subject to change by the grantor. The ILIT itself owns the insurance policies (and all the incidents of ownership), receives the proceeds when the grantor dies, and distributes the proceeds in accordance with its terms. The grantor can transfer presently existing policies to the trust (which remain part of the grantor’s taxable estate for 3 years) or the trust itself can apply for, and buy, a “new” policy on the grantor (which are immediately excluded from the taxable estate). The funds or the insurance policies that the grantor contributes to establish this trust are considered to be a “gift” for gift tax purposes.

Charitable remainder trusts (CRT) present a unique opportunity for those with a charitable intent. The grantor retains a right to payment from the trust (either a fixed payment or a percentage of the assets) for a period of time or the death of the grantor (whichever comes first), and thereafter the assets go to charities designated by the grantor. Although the payments to the grantor MAY be subject to income tax (depending on the composition of the assets and the amount of the payments), the grantor gets a charitable deduction upon funding the trust, and any capital gains from the CRT’s sale of assets are attributed to the charity rather than the grantor (hence, these are often funded with appreciated which are promptly sold by the CRT and re-invested). Grantors of CRTs often use the tax savings from the charitable deduction to purchase a life insurance policy which “replaces” the assets transferred to the CRT.    

Look for our Part Two follow-up post on the second type of trusts: Testamentary trusts.

By their very nature, trusts are complicated. These blogs are designed to give you an overview which should not be construed as legal advice. If you would like more information on these matters, you can contact us at info@kreamerlaw.com or 515-727-0900 to arrange an appointment.

Why Matt Damon Needs a Trust, Jason Bourne Does Not

Everyone enjoys watching movies. It’s something that really brings people together while they share the story of the characters on screen; I love it.

The other day, I was going through my movies and found the Bourne Series. If you are unfamiliar with Jason Bourne AND you enjoy great films, I strongly suggest this series. Bourne is one of the only individuals whom I can recall who would not benefit from estate planning, as he is a vagabond with no assets save for the clothes on his back and no objective in life but to right the injustices the world places before him. If you closely identify with Bourne, this article is not directed at you. But if you’re like his real-life actor Matt Damon, with a family and assets, do you need to consider establishing a trust?

It is a common misconception that trusts are only for the wealthy. Trusts are legal mechanisms which allow anyone to put conditions on the distribution of trust assets (those assets owned by the trust) upon death. This use for a trust exists in a vast majority of the estate plans we help create, regardless of the testator’s wealth.

Like estate planning, the purpose of a trust is to emphasize the planning aspect and allow the grantor precise control over his or her estate after death. We are especially fond of testamentary trusts to help plan for any contingencies which may arise.

In the next blog, we’ll explore the different types of trusts, but in the meantime if you, or someone you know, have any questions regarding estate planning please feel free to contact the Kreamer Law Firm, P.C. at http://kreamerlaw.com/  or by calling 515-727-0900.

Giving Away Information

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Businesses really have only two choices: they can grow (through formation or purchases) or go away (mostly by sale).  Those are the two things I spoke about during a recent Lunch and Learn presented for the West Des Moines Chamber of Commerce. If you would like to access the PowerPoint I used, click this link:Chamber Luncheon Final

Here are the high points of what we discussed:

  • Identifying an Opportunity;
  • How to Avoid Pitfalls;
  • What the Buying/Selling Process Looks Like;
  • Pricing the Transaction;
  • Structuring the Transaction.

Following the formal presentation I took questions from the attendees. The one item that stands out was a question about the size of transactions I normally worked on. I responded that in my 30+ years I have worked on transactions ranging from start-ups all the way through the sale of a $45,000,000 company, but the most important transaction is whatever my client(s) need to accomplish.

However, the best question came as I was packing up to leave.  An attendee came to me and asked, “Why is it that you simply gave us all of this information free of charge?” My answer was really pretty simple: “My job is to help businesses and individuals achieve their goals. For me, that includes providing people with an opportunity to expand their business knowledge.  Simply giving some valuable information away for free? No, I’m doing what I love.”

The Kreamer Law Firm specializes in business law as well as estate law.  We Get Things Done!

Buying and Selling a Business- A Lunch & Learn Event

Buying and/or selling a business requires many considerations.  For example, you may find yourself wondering:

  • How to identify the right opportunity as a buyer or a seller;
  • What pitfalls might lurk in the existing economy;
  • How will the pricing and the structuring of the transaction work;
  • What’s the process behind the transaction numbers?

Please consider joining me on August 13th. I’ll be hosting the Lunch and Learn event through the West Des Moines Chamber of Commerce and talking about this topic which is really, very useful in  a city like West Des Moines where businesses and companies thrive.

Buying or selling a business can be a very tricky process; even in a simple transaction there can be many questions. Come to the Lunch and Learn on August 13 which will be held at 4200 Mill Civic Parkway West Des Moines, IA and find out more about what it takes to get through the buying/selling process. The end result can be very rewarding for both parties.

This will be a great event and I can’t wait to answer your questions. Click this link to sign up. You don’t need to be a member to attend, so feel free to bring any and all questions you have.

This is a very important topic to discuss and if, in the meantime, you have any questions, feel free to email info@kreamerlaw.com, call (515)727-0900, or visit our website www.kreamerlaw.com


Employee Wages: Let’s Get to the Basics

Minimum Wage Dollars (2) Recently minimum wage has been all over the news.  Some states and even some cities have passed laws that have raised the minimum wage, recognizing what a person must earn to make a living. Because of this, people are asking, “How much must I pay my W-2 employees here in Iowa?”

The law in Iowa sets a minimum wage of $7.25/hour and applies to all employers whose gross annual sales are $300,000 or more. The Federal minimum wage is the same $7.25/hour and applies to all employers whose gross annual sales are $500,000 or more.  When both the Federal requirements and state law apply, it’s actually the law which sets the higher standards that must be followed by the employer. So, in the states that have passed higher minimum wage rates, the local law actually trumps Federal law.

The laws on wages in Iowa have some slight exceptions.  For example, if the business employs tipped employees (defined as an employee who makes $30/month or more on tips), then the business can pay as little as $4.35/hour (Iowa) or $2.13/hour (Federal).  However, in any given week where the employee’s wages do not average at least $7.25/hour, the business is required to pay the difference.

Another income regulation to consider is that Iowa law also allows for an employer to pay an employee an “initial employment wage” of $6.35/hour for that employee’s first 90 days of employment.  Federal law allows for employees under the age of 20 to be paid as little as $4.25/hour for the same 90 day period. This period allows the employee time to train until they are able to fully handle the workload.

If you, or someone you know, are in need of legal services regarding employment wage questions or employees, feel free to contact us at Kreamer Law Firm, P.C. through our website at www.KreamerLaw.com or by calling us at 515-727-0900.

Buying a Business, Essential Qualities: Commitment

This blog is part of a series of blogs on buying a business. We are first exploring the qualities you need when deciding to whether or not you are should buy a business. I encourage you to go back and read the previous blogs.

This week we are discussing access to commitment.

Commitment. The one indispensable characteristic of a successful Buyer is commitment. By this I mean that although a Buyer will not succeed simply because they ARE committed to the business; it is certain that the business will fail if they are not.  Business commitment takes many forms. Business ownership can take a toll on the Buyer’s social and family life in addition to their financial situation. Accordingly, a Buyer, and to some extent their family and friends, must be willing to make some short term sacrifices to reap long term benefits. Among the commitments successful Buyers make is to be “life long learners.” There are many good business books and courses. Four books that we strongly recommend are: “Getting to Yes” by Roger Fisher and William Ury; “Guerilla Marketing” by Jay Conrad Levinson; “From Good to Great” by James Collins and “E-Myth Revisited” by Michael Gerber.

If you would like assistance in regards to the purchase/sale of a business, please contact me at http://www.kreamerlaw.com.