What’s a Trust? Knowing Terms Can Simplify Process
By Saghir Aslam
Irvine , CA
(The following information is provided solely to educate the Muslim community about investing and financial planning. It is hoped that the ummah will benefit from this effort through greater financial empowerment, enabling the community to live in security and dignity and fulfill their religious and moral obligations towards charitable activities)
Wills and trusts are the nuts and bolts of estate planning. With them, you create the framework for carrying out your wishes after you die. Without them, protecting and passing on your wealth to heirs and beneficiaries becomes much more difficult.
Most people know what a will is. But many folks don’t have the foggiest idea what a trust is. To clear up the confusion, with the help of an attorney, I have put together a glossary of key estate-planning tools.
Wills. Few of us would be without a will if we knew how much trouble that might cause our heirs. Without one, state law dictates who gets your assets. Loved ones could lose out to estranged family members. Still many of us don’t have a will.
A will is a relatively simple document. It should name an executor to oversee carrying out your wishes. If you have children, it must name a guardian. And it must be specific on how you want your assets-cash, stocks, real estate, family antiques-distributed to your heirs and beneficiaries. We are blessed that Allah (SWT) has spelled out the inheritance laws in the Holy Book of the Quran. We simply need to put it on paper according to the laws of the state.
A will’s coverage is limited to property you own individually and that does not have a named beneficiary. That means joint property with rights of survivorship goes to the other owner no matter what your will says. Life insurance, retirement accounts and tax-deferred annuities go by law to the named beneficiaries. So none need be included in your will.
You can write a will yourself by obtaining a kit from the Islamic Society of North America (ISNA).
Execute a single copy of your will and use photocopies for any extra copies. Otherwise, probating your will could be held up while the court searches for all the signed originals.
In most states, legal fees for a simple will should not exceed $1,000. Wills can be completed by your family attorney who specializes in estate law.
Trusts. Trusts are effective tools to sort out complex family arrangements or sizable assets. Trusts, like wills, are meant to address both personal and family needs. But unlike wills, they can continue to carry out your wishes after you are gone.
Trusts are contracts between you and some designated trustee who will carry out your instructions. A trustee can be an individual, a corporation or a bank.
Trusts created during your lifetime are called inter vivos trusts, in simple terms revocable family trusts. Those created at your death, under the terms of your will, are called testamentary trusts.
You can set up trusts within your will instead of leaving the money directly to a beneficiary. The trustee carries out your wish, say, that your children’s inheritance be held until they reach 20, 30 or 40. A trustee might also by designated to arrange for someone to manage money for a spouse or a handicapped child.
Bypass Trusts. For married couples with assets of more than $650,000 in 1999, a bypass trust allows you and your spouse to shield more assets from Uncle Sam. Under current tax laws, you can pass on up to $650,000 tax-free to your heirs. But for amounts over that the federal government collects hefty estate taxes.
Set up a bypass trust, though, and you and your spouse each can pass on to your heirs up to $650,000 each, for a total of $1.3 million. ( A figure that rises in graded steps to $2 million by 2006).
Many couples with substantial assets fail to do this, lulled by IRA laws that allow you to pass everything on to your spouse. Trouble is, once both of you are gone, the tax man can collect a heavy toll on your estate for anything over $650,000.
With a bypass trust the surviving spouse can live off the income from the assets and even tap the principal in some cases. When he or she is gone, your heirs get up to $1.3 million passed on tax-free to them.
Durable Power of Attorney. If you are disabled and unable to communicate, your heirs may be blocked from using your assets to pay health-care and nursing-care bills. The situation can be horrific as your children scramble to find the money to care for you.
A durable power of attorney designates someone to act on your behalf when you are incapacitated. You can name anyone you trust. A lawyer can prepare a durable power of attorney document for $100 or more. You can also purchase forms at stationary stores, though again, be certain they reflect the regulations in your state.
Heath-Care Proxy. With this you can authorize a trusted relative or friend to make medical decisions for you. Say you are gravely injured and unconscious. A proxy knowing of your wish not to be kept alive using artificial means can act on your behalf. Forms are available in stationary stores but it is better to seek professional help.
In more than one instance, I had to help a family create a will with the assistance of an attorney. One instance was when a brother was informed, after the doctors told his wife, that he was dying. I was assigned the difficult task of getting the will signed by the dying husband. You think that was easy; I had tears in my eyes. Imagine what her husband felt like and what was going through his mind?
Let’s plan now so that none of us have to go through that particular ordeal.
(Saghir A. Aslam only explains strategies and formulas that he has been using. He is merely providing information, and NO ADVICE is given. Mr. Aslam does not endorse or recommend any broker, brokerage firm, or any investment at all, nor does he suggest that anyone will earn a profit when or if they purchase stocks, bonds or any other investments. All stocks or investment vehicles mentioned are for illustrative purposes only. Mr. Aslam is not an attorney, accountant, real estate broker, stockbroker, investment advisor, or certified financial planner. Mr. Aslam does not have anything for sale.)
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