Michael D. Madden, CFA
18400 Von Karman Ave., Suite 400
Irvine, CA 92612
949.474.6888
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Family Income Trust

The Family Income Trust is an irrevocable trust designed to provide maximum flexibility for trustee and family members, while offering the greatest allowable accessibility to the trust corpus and deferring estate taxation for over 100 years. 

That is quite a statement. The Family Income Trust is not just another irrevocable trust. It is intended to do far more than just hold life insurance policies, which is the case with most irrevocable trusts. In fact, it is so versatile that it can be used even in strategies that do not necessitate the purchase of life insurance. In short, if your goal is to keep your wealth in your family – not just for your children, but for grandchildren and great grandchildren as well – the Family Income Trust is the one strategy which you must consider.

Flexibility

As with most irrevocable trusts, the funds held in the Family Income Trust may be used after your death to buy assets from your taxable estate, or the Family Income Trust funds can be loaned to your estate to provide liquidity to pay the often oppressive estate taxes which are due within nine (9) months of death.

The trustee is also empowered to use the funds in the Family Income Trust as a family bank, both during your lifetime and after your death. The funds in the Family Income Trust can be distributed outright to your family members for their needs, or the trustee may loan the funds to them. Significant tax savings and creditor protection can be achieved through loans rather than through direct distributions.

The Family Income Trust can even own homes, boats, automobiles and family businesses as part of its assets. For example, if the Family Income Trust owned the home in which your son, his wife and their children reside, they would be allowed to live in the house rent free. They would be responsible for the daily expenses and upkeep. However, if your son was ever found liable in a lawsuit, the house would not be deemed one of his assets. Thus, his creditors would not be able to force the sale of the home. Your family would be protected. This same argument would carry through if your son and his wife were to divorce. Since he does not own the house, he cannot be ordered to give it to his wife.

Accessibility

While flexibility and creditor protection are necessary, they are of little use to your family if they are denied access to the property in the Family Income Trust. The Family Income Trust is designed to provide your children and grandchildren with nearly complete access to the Trust assets. Distributions can be made by the trustee to all of the beneficiaries that you choose, for their health, support, maintenance and education. These are broad terms indeed. Education, for example, is defined to include tuition at all levels from nursery school through post-graduate education, as well as private tutoring, sports and music lessons, standardized test enhancement programs, travel and much more.

As you can see, the trustee holds significant power over the Family Income Trust. Matters concerning investment of Family Income Trust funds and distributions of assets are the primary responsibility of the trustee. Because distributions are limited to the standards set forth in the preceding paragraph, your children and later, your grandchildren, may act as trustees even though they will also be the beneficiaries of the trust. However, in order to keep the property in your Family Income Trust from being taxed in your estate at the time of your death, neither you, nor your spouse if you are married, may act as trustee.

Tax Deferral

While the flexibility and accessibility available through the Family Income Trust are important provisions, perhaps the single most important aspect of the Family Income Trust is the incredible estate tax savings which it can afford your family.

Property which you transfer to an irrevocable trust, even one that is not a Family Income Trust, will be made via gift, either as part of your $14,000 annual gifts to your beneficiaries or through reduction of your available $5,340,000 Lifetime Exemptions (10,680,000 for a married couple). In addition to gifting assets to the trust, you can also sell assets to the trust tax-free.

By giving property to an irrevocable trust and retaining no control over it, the property should not be deemed part of your assets for estate tax purposes. Thus, whatever you have given to the Family Income Trust or sold to the Family Income Trust and all of the growth thereon, will avoid tax at the time of your death.

The Family Income Trust takes this concept and goes one step further. In the ordinary irrevocable trust, the property will pass, tax-free, to your children at the time of your death. However, when your children die, any remaining amounts of the property you have left to them, along with any wealth they have been fortunate enough to accumulate during their lifetime, will be taxed at rates up to 40%.

The Family Income Trust is designed to avoid inclusion in your children’s estate. When your children die, none of the property in the Family Income Trust will be taxed. Instead, the Family Income Trust will continue in existence for the benefit of your grandchildren. Estate taxes will be incurred only at the time of death of your grandchildren or great grandchildren. In all likelihood, your grandchildren will not die for 75 years, or more. By not paying estate taxes for all those years, you give your family the opportunity to use the property that would otherwise have gone to the IRS.

As you can see, the Family Income Trust is one of the most powerful estate planning strategies available today. By combining maximum flexibility, accessibility and tax savings in one vehicle, you can truly keep your wealth in your family.