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Funding Your Estate Plan

refers to the act of placing the assets that you and your family own into a Trust. Funding is accomplished by re-titling the assets in the Trust's name. The act of funding one's Trust is so important, since the Trust can only benefit those assets that it maintains title to.

Thousands of Americans each year take the time, effort, and expense of diligently setting up a trust of some type, but then fail to fund the trust with their assets. The actual establishment of the Trust is only half the battle. Your most valuable assets, which you want to be controlled by the Trust, must be titled with the Trust's name for the Trust to afford any benefit to your family.

There is no universal rule of thumb when it comes to funding your estate plan. Trusts should only hold title to certain types of financial vehicles. The following is not intended to be a complete list of financial vehicles but, rather a listing of the most common ones our clients own today. The financial vehicles are listed alphabetically, in order for you to get some idea which estate strategy fits which vehicle.



Annuities avoid probate upon the death of the annuitant, and are viewed by many as estate planning tools for this very reason. However, in estate planning, there are only two wealth transfer strategies where annuities are appropriate: in the A Trust of an A-B Trust, or within a Charitable Remainder Trust.

Within the A Trust, an annuity works well because the principal and earnings grow completely income tax-deferred. When the owner of an annuity is ready to withdraw from the annuity contract, the owner has two options: a lump sum distribution, where earnings (and principal, in qualified annuities) are subject to income tax, or over the owner's lifetime, in the form of monthly income. Also known as annuitization, this monthly income withdraws principal and interest on a tax-preferred basis.

Annuities are designed to be withdrawn or annuitized at some point. If you die with an annuity contract in your estate (where either the second spouse dies, or there is no spouse at all), the annuity does not qualify for a stepped-up cost basis and will be subject to income taxes. It is therefore a good idea to draw down the annuity after the first spouse has died. This makes the annuity an excellent choice for the A Trust when following the Shrinking Trust Principle.

Annuities are also suitable for Charitable Remainder Trusts. However, they should never be used in an irrevocable trust. The owner of the annuity (in this case, the irrevocable trust) would be considered a non-natural person. Since a non-person owns the contract, the gains lose their tax deferred status, thus defeating the purpose of owning an annuity in the first place.

Variable annuities are sold through registered representatives by prospectus. You should read the prospectus carefully prior to investing or sending money. To request a prospectus, click here.


Equities, Stocks and Mutual Funds

Common stock funds, whether they are managed by mutual fund managers or private money managers, are an excellent funding method for estate planning strategies. Over the past 50 years, equities have far outperformed bonds or money market funds, making them suitable investments for long-term objectives. Most private foundations invest in managed equity accounts because of their long-term growth.

Equity investments are suitable for both trusts in an AB Trust. Family Limited Partnerships can also utilize equity investments, particularly those with rising dividends. The dividend can go to the partnership creator as a form of additional income under the deferred payment plan, while the principal and the appreciation of the stock or managed equity account is retained by the limited partner. Therefore, both the assets and their growth pass outside the estate to the general partner.

Equities, in the form of common stocks, mutual funds, or managed accounts, are also good investments for Charitable Remainder Trusts. However they do not have the principal or appreciation guarantees that other investments do, like annuities.

When equities are owned by a trust, it is important to be aware that the trust is in a slightly higher income tax bracket than an individual. If stock dividends are paid to the trust beneficiaries, then taxes are not a problem. But if the dividends are retained and reinvested to make the trust grow, the trust could get hit with steep income taxes. It may be better for the trust to invest in growth stocks which pay little or no dividends, but produce investment returns through appreciation. That way, current income taxes are avoided.

Alternatively, you may want to place equities inside a Legacy Trust. The Legacy Trust may be drafted as a grantor trust, which allows you to pay the taxes on income earned by the trust. You can consider these taxes an additional gift to the trust beneficiaries, since it is not subject to estate or gift taxes.

Mutual funds are sold through registered representatives by prospectus. You should read the prospectus carefully prior to investing or sending money. To request a prospectus, click here.


Gov't and Corporate Bonds

Long-term bonds and funds have been very popular investments for individuals and qualified retirement plan accounts. However, bonds or bond funds are usually not recommended as permanent funding vehicles for estate planning strategies. This is due to bonds' history of fluctuating principal and interest, and their relative lack of appreciation potential.


Life Insurance

Cash-rich life insurance, the type Fortune 500 companies use, is an ideal funding vehicle for all versions of the Generation-Skipping Dynasty Trust. Life insurance is the only vehicle that is self-completing, meaning that your funding objectives (whether you seek $1 million, $2 million, $5 million, $10 million or more) are achieved immediately upon the passing of the owner.

Individual life insurance and second-to-die life insurance are commonly used in funding the Generation-Skipping Dynasty Trust. Term life insurance, while useful for ensuring a support and income for beneficiaries, is not always ideal when used with advanced estate planning techniques. For instance, when using life insurance to fund the Generation-Skipping Dynasty Trust, it is paramount that cash-rich life insurance be used (not "term" insurance) to avoid any loss of liquidity. At the end of ten years, the policy's cash value, either on a guaranteed basis or using very conservative interest rate assumptions, should equal the amount of premiums paid in.

It's important to note that the life insurance is owned by the Trust. The Trust creator transfers cash to the Trust, which in turns pays the life insurance premiums.

Life insurance, purchased from highly-rated insurers, is frequently used by Fortune 500 companies to finance their deferred compensation plans. Here are just a few of the reasons why Fortune 500 companies rely on life insurance plans:

  • The gain on the death benefit, which can be a substantial amount over the premiums paid in, passes 100% income tax free if paid as a lump sum.

  • The accumulation of the cash value, or investment account, grows income tax free.

  • All withdrawals, up to the amount of the total premiums paid, are income tax free under current tax law.

  • Policy loans can be taken on an income tax-free basis; however, they may be subject to a small interest charge, under current tax law.

Variable Universal Life Insurance is sold through registered representatives by prospectus. You should read the prospectus carefully prior to investing or sending money. Insurance policies may contain exclusions or limitations, please consult the carrier or insurance agent for more infromation. To request a prospectus, click here.


Limited Partnerships

Limited partnerships should not be used as investment vehicles. Many Limited Partnerships are created for tax reasons, not investment reasons. Most wealth transfer strategies work best when funded with cash-rich, income-building vehicles. However, there is always an exception, such as a family venture utilizing a limited partnership format. An Account Specialist can answer your specific Limited Partnership questions, and how they could fit into your estate plan.

Keep in mind that limited partnerships are sold through registered representatives by prospectus. You should read the prospectus carefully prior to investing or sending money. To request a prospectus, click here.


Modified Endowments

Modified Endowment Contracts (MECs) are a cross between an annuity and a life insurance policy. The forerunner of the MEC was the single premium whole life contracts, used to offer tax-free loans. MECs, whose interest rates can be fixed or flexible, have a death benefit that passes income tax-free. This death benefit usually starts out about double the amount contributed to the plan. And MECs are similar to other transactional investments, since you simply make a onetime premium or single payment into the account.

The MEC really combines the best of two worlds. Like an annuity, the dollars in a MEC grow tax-deferred. And, like an insurance policy, the MECs death benefit passes income tax-free. Because of these benefits, a MEC is an ideal asset for the B Trust of an AB Trust, when following the Shrinking Trust Principle.

A MEC is also excellent when funding the Personal Access version of The Legacy Trust with a one-time, large lump sum payment. A variable MEC provides the opportunity for tax-deferred growth and professional money management, while offering a death benefit that passes income and estate tax-free.


Municipal Bonds

Municipal bonds, because of their potential federal income tax-free payment, have proven to be very popular investments. The Generation-Skipping Dynasty Trust can actually own municipal bonds. One strategy often used in dynasty trusts is to use the tax-free bond interest to substantially increase the TrustÁs value by purchasing life insurance on the lives of the trust creator(s).

Family Limited Partnerships can also use municipal bonds as an investment vehicle. The advantages are tax-free income generated from the bonds, as well as substantial discounts on the value of the bonds. These benefits are derived due to the lack of control and marketability inherent in limited partnership interests.


Real Estate

Real estate, including apartment buildings, commercial shopping centers, office buildings and raw land are excellent investments for Family Limited Partnerships. Real estate that has a positive cash flow can generate income for you during your lifetime, when held in a Charitable Remainder Trust. A Charitable Remainder Trust also allows you to sell highly appreciated real estate without paying capital gains tax. Once inside the Trust, real estate is usually sold and the proceeds invested in income-producing investments.

Because of the tax ramifications and capital gains concerns, it usually is not wise to re-title real estate inside a dynasty trust or The Legacy Trust.

Certain states may have their own restrictions on some funding vehicles and wealth transfer strategies described.

Read our Funding Special Report before effecting any changes with your current estate plan.


Each family's situation is different. Advanced wealth transfer strategies all have various funding options. However, we can lead you down the path of education and help you learn more. Then, you can make an informed decision as to how best to fund your estate plan, to benefit your own family.

For a FREE Special Report on Funding Options, click here!









Why Plan Your Estate?
Introduction to Wills
Living Trusts
The Perils of Probate
Durable and Medical Power of Attorney
Taxes, taxes, taxes!
Creating a Second Estate
Dynasty Trusts
The Legacy Trust
Family Limited Partnerships (FLiPs)
Charitable Trusts
Building on a Solid Foundation
Funding Your Estate Plan
Choosing a Qualified Attorney
How You Can Plan for Your Own Estate































What's Your Tax Bracket?









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