Trusts

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A Trust is a legal arrangement that transfers ownership of assets from a grantor- the person who established the trust to a Trustee.  The trustee, who may be an individual or an institution, administers the trust and manages the assets for the benefits of the trust beneficiary.  The Trust Agreement contains all of the instructions from you - the grantor to the trustee regarding how your assets should be managed, and how, when, and to whom yours assets will be distributed.  A Trust may provide many benefits for your estate planning. These benefits include:

• Avoid the costs, time delay, and publicity of probate
• Have some control over how your assets are payable and used by your heir after your death
• Provide income to a surviving spouse, but also ensure that the remainder of your estate goes to your children from a previous marriage after your spouse dies.
• Protect the assets that are given to your children or other beneficiaries from their creditors (and/or ex-spouses) and lawsuits
• Ensure that your assets are protected and managed according to your personal wishes should you become in capacitated
• Avoid capital gains taxes
• Reduce or eliminate estate taxes
• Remove assets from your taxable estate
• Protect life insurance proceeds from estate taxes
• Make tax-advantage charitable gifts

Types of Trusts

There are two basic types of trusts which can be used for estate planning.  The first of these is the “testamentary trust” which is written as part of a person’s Last Will and Testament and only comes into being at your death.  It can be used in tax planning or to manage assets for minors or other beneficiaries.  The second is the “living trust” which is created and takes effect during lifetime.  For many persons, the avoidance of probate and any guardianship in the event of their incapacity is a prime reason for estate planning, and this can only be achieved by the use of a living trust.  There are several different kinds of trust, but the type of trust you select depends upon your estate planning goals and objectives.

Commonly used trusts include:

Revocable Living Trust: A revocable living trust is a legal document that, like a will, includes your instructions for what you want happen to your assets after you die. But, unlike a will, the living trust can avoid probate at death. It can prevent the court from controlling, your assets if you become incapacitated. And it can give you, not the courts, control of the assets you leave to your minor children and/or grandchildren.  You keep full control of the assets that you put into the trust. As trustee of your trust, you can do everything you could do before, including, buying, selling, investing, etc. You can make changes or even cancel the trust and take the assets back.

Irrevocable Living Trust: An Irrevocable Living Trust is commonly used for tax planning.  However, the trade-off for the tax advantages offered by an irrevocable trust is that once the trust is established its terms cannot be altered, assets cannot be removed from the trust, and the trust cannot be terminated.

Life Insurance Trust: An Irrevocable Life Insurance Trust (ILIT) is, as the name implies, is a vehicle for holding life insurance policies.  The primary goal of such a trsut is to shift ownership of the policies from the insured in order to remove the policy proceeds from taxation at the death of the insured and/or his spouse.  With a life insurance trust, the trust is the owner and beneficiary of the life insurance policies on your life.

If you possess any incidents of ownership in a life insurance policy at the time of your death, the insurance proceeds will be included in your estate and subject to federal estate taxes.  However, an easy way to remove life insurance from your estate is to make an Irrevocable Life Insurance Trust the owner and beneficiary of the policy.  At your death, your trustee collects the insurance proceeds and manages them for the benefit of your family according to the instructions your put in the ILIT when you set it up. After your spouse’s death, the money in the trust can pass to your children or grandchildren free of estate taxes.

Qualified Terminal Interest Trust: A Qualified Terminal Interest Property (QTIP) trust is very useful if you are married and have children from a previous marriage, and want to ensure that they receive your assets. The QTIP trust allows you to provide income to your surviving spouse for life If the surviving spouse remarries, assets are protected from the new spouse.  Upon the death of the surviving spouse, the trust property passes to the beneficiaries - your children from the earlier marriage.

The basis purposes of QTIP trust are to:

• Postpone estate tax on the estate of the first spouse to die until the second spouse dies.
• Leave money and property for the use (but not outright ownership) of the surviving spouse
• Name final beneficiaries to receive the trust property at the death of the surviving spouse (children from a prior marriage)Name final beneficiaries to receive the trust property at the death of the surviving spouse (children from a prior marriage)

Spendthrift Trust: The Spendthrift trust is used if you fear your heirs will not be able to manage their inheritance, because they are too young, might foolish spend it, or might be influenced by friends. The trust can specify the investment objectives which the trustee must follows, as well as set the criteria for eventually distributing the estate to the heirs, often when they reach a certain age. This type of trust is also one in which the interest of the beneficiary cannot be assigned by or reached by his creditors. This trust creates a fund from which the beneficiary is maintained, while securing the assets from his creditors.

Charitable Remainder Trust: A Charitable Remainder Trust lets you convert highly appreciated assets (i.e, stock, real estate, etc.) into lifetime income.  If you contribute appreciated property you can avoid capital gains tax  and increase your income.  The trustee sells the asset at full market value, avoiding the payment of capital gains tax when the asset is sold, and re-invests the proceeds of the income producing assets and increases your income. Typically, the trust provides income to you (or you and your spouse) for life.  At your death (or you and your spouse’s death), the trust remainder goes to your charities of choice. Using a Charitable Trust give you a current income tax deduction. The trust assets are insulted from creditors, free from federal taxes, and avoids probate.

Charitable Lead Trust: Charitable Lead Trust is the opposite of the Charitable Remainder Trust. You transfer an asset to the trust, which reduces your estate. But instead of paying the income to you, the trust pays its to a charity for a set number of years, or until you die. Then the trust assets will go to your spouse, children or other beneficiaries.

Special Needs Trust: Special needs trusts allow a disabled persons to receive gifts, lawsuits settlements, or other funds and not lose his or her eligibility for certain government benefits.  Such trusts are drafted so that the funds will not be considered to belong to the disabled person in determining eligibility for public benefits.  A Special Needs Trust can provide your disabled loved one with a large variety of goods and services while at the same time preserving his or her SSI and Medicaid benefits.

Qualified Personal Residence Trust: A Qualified Personal Residence Trusts (“QPRT”) is useful if your home is likely to appreciate in value.  A QPRT trust lets you save estate taxes by removing your home (a substantial asset) from your estate now, but  you can continue to live there.  By using a QPRT, you can remove substantial value for your taxable estate. Here’ how it works.  You transfer your home to a trust for a period of time, usually 15 - 20 years.  During this time, you continue to live in your home. When the time is up, its transfers to the trust beneficiaries, usually your children.  If you wish to stay there longer, you may make arrangements to pay rent.  At the end of the term of the trust, the residence is typically distributed from the trust to yours children or….held further in trust.  After the term of the QPRT you have removed the initial value of the residence from your estate and all subsequent appreciation on the value is removed from your taxable estate.  When you transfer property to the trust, fair market value of the home is discounted to reflect the terms of the transfer.  A personal residence trust lets you save estate taxes by removing your home and any future appreciation on it from your taxable estate - yet you can also keep living there.

Grantor Retained Annuity Trust (GRAT) and Grantor Retained Unitrust (GRUT): These trusts let you transfer an income producing asset (stock, real estate, business) to a trust for a set number of years, removing it from your estate, and still receive the income.  (If the income is a set amount, the trust is called a GRAT.  If the income fluctuates, it’s called a GRUT.  When the trust ends, the asset will go to the beneficiaries (usually your children).  Since they will not receive until then, the value of the gift is reduced.

A GRAT or GRUT is particular useful where the client is single and has a substantial estate upon which federal estate taxes are certain to be paid.  In the case of a married couple with an estate in excess of the couple’s combined unified credit equivalent or reduce taxes on the death of the second spouse to die.