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Estate Planning: Your Family, Your Wealth, Your Legacy.

Trusts

Trusts are one of the most useful and powerful estate planning tools available.  Despite popular belief, you do not have to be a Steve Jobs or Bill Gates to need or create one.  Trusts are so useful because they can be used to deal with estate, tax, investments, and financial planning concerns.  Trusts are complex legal tools, which really do require the assistance of a professional to set-up properly.  Having names spelled properly and in the right places is only a small part of the trust planning process.  Online services and books from the library may be convenient and inexpensive, but are also a hazard.  It takes time to acquire the knowledge necessary to counsel on the best options for an estate plan.

What are some of the things that trusts can help you do?:

  • Provide for you and your family in the event of disability, illness, or death
  • Achieve income, estate, gift, and GST (generation-skipping transfer) tax savings
  • Protect the loss of your assets from divorce, creditors and predators
  • Manage business assets
  • Protect assets left to minors
  • Minimize or avoid probate

There are dozens of types of trusts.  Some professionals working in the area of estate planning have created their own special names for trusts to make it appear they provide a special product that others do not.  Here we will discuss some of the different types of trusts using their most common name.

2503(c) Trust:  The name of this trust comes from the section of the tax code, which allows for its creation.  This trust is for a child under the age of 21.  The trust assets must be used for the benefit of a minor child without restriction.  Trust assets must be invested in income producing assets like stocks, bonds, and CDs.  Once the child turns 21 the assets of the trust must be distributed to them.  If the child dies prior to turning 21, the trust assets must be distributed to their estate.

UGMA/UTMA (Uniform Gift to Minors/Uniform Transfer to Minors:  These popular and well-known custodial accounts (not a trust) are simple and have no cost but are inflexible.  This may be the best option if the assets for a minor child do not warrant the establishment of a trust.  Like a trust, the assets of the account belong to the child and may only be used for the benefit of the child.  Chapter 141 of the Texas Property Code addresses transfers to minors.  A gift to an UTMA account is irrevocable.  The minor can require an accounting at age 14.  The assets of the account must be released to them upon turning 21.

529 Plan:  These plans are a trust substitute and used for the specific purpose of saving money for college.  The funds can be used to pay for tuition, room and board, and similar expenses.  You can give more money to this type of account than you can to a child’s educational trust, which is limited to the annual gift tax exclusion amount ($13,000).  For tax purposes, you can elect to treat contributions as if made over a 5 year period, thus you can give $65,000 in a year.  As long as the money is used for higher education purposes, it will not be subject to income tax.

Accumulation Trust (aka Complex or Discretionary Trust):  This trust gives the trustee the authority to accumulate income in the trust versus requiring that all income be distributed to beneficiaries.

Asset Protection Trust:  This trust comes in two flavors.  The domestic asset protection trust (aka DAPT) and the international asset protection trust (aka IAPT, foreign or offshore trust).  Both types of trusts are formed to make it difficult for creditors and predators to reach your assets.  These trusts require very sophisticated planning because you can run afoul of federal law, which could end in fines, the destruction of your trust, or criminal charges.

DAPT:  Currently 12 U.S. states provide domestic asset protections trusts.  The 12 are New Hampshire, Tennessee, Wyoming, South Dakota, Missouri, Oklahoma, Utah, Colorado, and Rhode Island. In addition, the three states that are considered to have the best asset protection laws are Nevada, Delaware, and Alaska.  Provides creditor protection for self-settled trusts, which is usually not the case.

IAPT:  You move your assets to a jurisdiction with laws unfavorable to creditor claims.  These trusts allow you access to investment opportunities that you otherwise would not have due to SEC regulation.  These trusts allow you to invest in other currencies and buy non-dollar denominated securities.  Nevis, Cook Islands, Belize, and Bahamas are jurisdictions that have well established asset protection laws not subject to frequent change.

Bypass Trust (aka credit shelter trust, family trust, “A” trust):  Upon the first spouse’s death, assets are transferred to the trust to provide for the surviving spouse.  This trust prevents the doubling up of assets in the estate of the spouse who dies second.

Charitable Lead Annuity Trust (aka front trust):  A trust designed to permit payment of a fixed amount annually, for a specified period, to a charitable beneficiary.  At the end of the specified period, ownership of the trust property and the income from it passes to a non-charitable beneficiary.

Charitable Remainder Trust:  A general name used to describe a type of split interest trust that includes a CRAT, CRUT, CLAT, PIF.  In this design a charity receives the remainder of a trust after disbursements for a term of years to a non-charity beneficiary comes to an end.

Charitable Remainder Annuity Trust (CRAT):  A trust designed to permit payment of a fixed amount annually, for a specified period, to a non-charitable beneficiary (you) with the remainder going to charity.

Charitable Remainder Unitrust (CRUT):  A trust designed to permit payment of a periodic sum to a non-charitable beneficiary (you) with the remainder going to charity.  The difference between this and a CRAT is how the periodic sum is calculated.

Defective Trust/Intentionally Defective Grantor Trust (IDGT):  An intentionally defective trust is an irrevocable trust.  It is intentionally defective because it purposely violates one or more of the grantor trust rules of the Internal Revenue Code.  It is designed to have the following characteristics:

  1. Property transfers to the trust are considered completed gifts for federal gift tax purposes.
  2. Trust assets are not included in your taxable estate.
  3. You are treated as the owner and taxed on the income from the trust for federal income tax purposes.

This type of trust is useful when you want to remove an appreciating asset from your taxable estate with making a taxable gift.

Irrevocable Life Insurance Trust (ILIT):  A trust designed to hold life insurance policies, the goal being to exempt the insurance proceeds from federal or state taxation at the death of the insured.  The proceeds can provide a pool of cash to beneficiaries to pay estate taxes, loan money to or buy assets from the insured’s estate.

Generation Skipping Transfer Tax Trust (aka Dynasty Trust/Perpetual Trust):  A trust setup under the laws of a state that allows the trust to exist forever or for a period of time beyond the normal perpetuities period.

Grantor Retained Interest Trust:  There are several different trusts falling into this category.  These trusts are irrevocable.  A grantor can transfer to them a personal residence, a closely held business, and other assets, which generate income and have substantial value and appreciation potential.  The grantor retains an interest for a period of years at the end of which the principal passes to a non-charitable beneficiary of the grantor.

Grantor Retained Annuity Trust (GRAT):  This irrevocable trust gives you (grantor) the right to receive a fixed amount of money, at least annually.  The fixed amount can either be a dollar amount or a percentage of the initial value of the trust.  This is an effective way to give away substantial assets at a reduced gift tax cost.

Grantor Retained Interest Trust (GRIT):  This is an irrevocable trust to which you can transfer assets such as a home, a closely held business, or other assets which generate income and/or have high value and substantial appreciation.  You may retain an interest in the trust created for a number of years.  At the end of the term of years, the principal passes to a charity.  A GRAT, GRUT, and QPRT are grantor retained interest trusts.

Grantor Retained Unitrust (GRUT):  This irrevocable trust gives the right to an annual payment of a fixed percentage of the net fair market value of the trust assets.  It can last for a specified period of years or for the grantors life.  This is an effective way to give away substantial assets at a reduced gift tax cost.

Marital Deduction Trust (aka A-B trust/ABQ trust):  This trust is designed to give the surviving spouse the full use of the family’s economic wealth while minimizing the amount of federal tax payable at the death of the second spouse.  The planning behind this trust capitalizes on a combination of the unlimited marital deduction and the unified credit.  The marital deduction is a deduction for gift or estate tax purposes for property passing to a spouse or to a qualified trust.  The unified credit (for 2012 is 1,772,800) is a credit, which can be applied against either gift or estate taxes.

Pooled Income Trust/Fund (PIF):  A trust generally created and maintained by a public charity rather than a private donor.

Personal Residence Trust:  A trust used to remove the value of your primary residence or vacation home from your estate at a reduced gift tax cost.

Qualified Domestic Trust (QDOT):  A trust used when your spouse is not a citizen to maximize gift or estate tax by qualifying for the unlimited gift or estate tax marital deduction.

Qualified Personal Residence Trust (QPRT):   A trust used to remove the value of your primary home or vacation home from your estate at a discounted gift tax cost.

Qualified Subchapter S Trust (QSST):  A trust to  hold stock in an S corporation without jeopardizing the S corporation tax benefits.

Qualified Terminable Interest Property Trust (QTIP): A marital deduction trust qualifying for the unlimited gift or estate tax marital deduction.  It allows you to preserve assets for future beneficiaries (your children) while also providing for your spouse during his/her lifetime by using a life estate.  It also allows for the deferral of estate taxes.

Revocable Living Trust:  This popular trust can be changed by you during your lifetime and managed by you during your lifetime.  This trust is self-settled, so it is not protected from the reach of creditors.

Special Needs Trusts:  This type of trust is created to specifically deal with the care of a disabled child or adult.  It can be created under a will or as a standalone trust.  These trusts reserve funds for the care of the child or adult by restricting distributions to protect assets from the reach of governmental entities.  It reserves the ability to still obtain assistance from governmental agencies for the care of the child or adult.

Spendthrift TrustTechnically this is not a trust but a provision in a trust the purpose of which is to protect trust assets from the reach of a beneficiaries creditors.

Sprinkle Trust (aka spray trust, pot trust, discretionary trust):  Technically not a trust but a provision in a trust which allows the trustee to distribute trust income or assets to the beneficiary the trustee deems most in need.  The trust sets-forth a designated list of beneficiaries from which the trustee is to limit his choice.  This provision allows the flexibility of determining at a date after the trust makers death who needs trust assets.