Trusts Are Endlessly Adaptable
Meet Changing Needs & Sidestep the Courts
Trusts come in many shapes and sizes and we can find the right one for you.
Trusts provide that extra peace of mind, knowing that your assets pass seamlessly to loved ones - no courts, no problems.
The coronavirus pandemic has shown us that we must prepare for the unexpected. The courts are still backed up. In these uncertain times, a Revocable Trust has shown itself to be superior to a Will because Trusts avoid the probate process and pass assets directly to your beneficiaries.
What is a Trust?
A trust is a legal entity that holds assets for a beneficiary and is funded by simply retitling assets in the name of the trust. There are various types of trusts used for distinctive purposes - such as to avoid probate or minimize taxes.
Choosing the right trust depends on what you're trying to achieve and your particular circumstances.
Common assets placed in a trust are houses, brokerage accounts, bank accounts, business interests,and life insurance policies.
Types of Trusts
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Important Trust Terms
Intervivos Trust: An intervivos trust, also called a living trust, is established during
the creator’s lifetime – in Latin, a gift between the living.
Testamentary Trust: A testamentary trust only comes into existence at the creator’s death.
Grantor: An individual who creates a trust is called the grantor or settlor.
Trustee: The trustee manages and
distributes the assets in the trust for the
benefit of a beneficiary, as dictated under
the terms of the trust.
Beneficiary: A person who benefits from
the trust assets. A beneficiary can have a right to income and/or principal.
Revocable Trust: The grantor of a revocable
trust can alter or revoke the terms of the
trust at any time and for any reason.
Irrevocable Trust: An irrevocable trust
generally cannot be altered or terminated
without the permission of the beneficiaries
or, under certain circumstances, through
Grantor Trust: A grantor trust is structured
so that the individual who creates the trust
is considered the owner of the assets for
income tax purposes.
Non-Grantor Trust: A non-grantor trust
must have its own tax id number and is
taxed on income generated from trust
assets at the highest tax rate of 37%. Taxes are reduced by the amount of income distributed to trust beneficiaries by issuing a Schedule K-1.
Types of Trusts
A Revocable Trust is a grantor trust that can be altered or revoked by the grantor for any reason. The grantor acts as trustee and reports any income on their own tax return. A revocable trust is used to avoid probate when sidestepping the Surrogate Court is important for a seamless transition of assets to beneficiaries.
Traditional reasons for a revocable trust:
A trust may be a little more expensive to set up than a Will, it avoids the cost of probate. Besides the statutory and legal fees, there are other costs to probate that most people do not consider. For example, if someone passes away owning a house, family members are forced to pay mortgage payments and other bills while waiting for the Will to be probated.
Disinheriting a natural heir or leaving assets to a friend or domestic partner
If disinheriting a family member who would inherit if the decedent did not have a will – such as a parent, child or sibling – because a trust is much harder to contest than a Will. With a Will, any relative that would inherit if someone died intestate (without a will) are given a court date to appear to object and get a copy of the Will. As opposed to a revocable trust, where only named beneficiaries have a legal right to a copy of the trust and there is no court supervision. Anyone contesting a trust would need to hire their own lawyer.
A Will, once someone dies, is public record.
Out of State Property
If out of state property is placed in a trust, then there is no need for ancillary probate in another state. Otherwise, the law is that wherever you own “dirt” there has to be a separate probate procedure in that state.
A revocable trust is an excellent way to plan for incapacity. The grantor can name a successor trustee to control and maintain the grantor’s assets as dictated under the terms of the trust. This provides flexibility for the grantor, who can change successor trustee at anytime, and avoids the need for a guardianship hearing.
Income Producing Property
When someone owns income producing property in his or her own name, nobody has the legal authority to collect rents or access the deceased’s accounts to pay bills, until the Surrogate’s Court grants authority to an Executor or Administrator. This could take several months to several years, depending on the complexity of the estate and whether we are in the middle of a pandemic or other emergency.
Closely held business
If a decedent dies as sole owner of a business and there is no succession built into the operating agreements, then nobody can step in and legally run the business or access the business account. Heirs must wait until the Surrogate’s Court grants authority to an Executor or Administrator.
Intentionally Defective Grantor Trust
An Intentionally Defective Grantor Trust (IDGT) places assets outside the grantor’s estate for estate tax purposes but the grantor retains enough control that the income is taxed to the grantor. The IDGT allows the grantor to gift or sell appreciating assets to a trust so that the gift grows tax free. The trust dictates how assets will pass to beneficiaries upon the grantor’s death.
The grantor of an IDGT can retain the power to substitute assets of equal value under IRC § 675(4)(C). This allows the trustee to swap out low basis assets for high basis assets to avoid capital gains.
The IDGT is gaining in popularity due to the expected premature sunsetting of the historically high federal gift and estate tax of $11.7 million. By making a gift while the federal exemption is high, the grantor captures the exemption amount while it is still available. The IRS finally issued regulations, IR-2019-189, stating that there will be no “clawback” for gifts made under the increased exemption.
The grantor can avoid using any of the estate exemption by selling assets to the intentionally defective grantor trust, in exchange for an interest-bearing promissory note. Since the IDGT is a grantor trust, the sale is not a taxable event. The note, if still existent at grantor’s death would further reduce his or her taxable estate.
Irrevocable Life Insurance Trust
An Irrevocable Life Insurance Trust (ILIT) is created to own a life insurance policy while the insured is alive, and pay out to beneficiaries upon the insured’s death. Upon the grantor’s death, the proceeds from the policy are not included in the deceased’s estate so are not subject to state and federal estate tax.
Usually the life insurance premiums are paid to the trust by the grantor using the annual gift tax exclusion of $15,000 per individual. How does that work if the gift is actually going to pay the premium? The trustee must send each beneficiary a “Crummey” letter, notifying them of their right to withdraw the contribution within 30 days. Since it is in the beneficiary’s’ best interest to allow the gift to accumulate (and thus pay the premium), they do not withdraw it. Any gift to the trust exceeding $15,000 a year goes toward the grantor’s federal lifetime estate tax exemption – currently $11.7 million but do to sunset in 2026 if not sooner.
If the grantor transfers an existing life insurance policy to the ILIT, there is a three year lookback period in which the death benefit could be included in the grantor's estate. If the ILIT purchases the policy, there is no such lookback.
Spousal Limited Access Trust
A Spousal Limited Access Trust (SLAT) is an irrevocable trust created by one spouse for the benefit of the other spouse during their lifetime. The beneficiary spouse can receive income and principal distributions from the trust – thereby giving the grantor spouse indirect access to the trust. The SLAT can also be structured to have additional beneficiaries. The grantor controls who the ultimate beneficiary of the principal is upon the donor spouse’s death.
Spousal Limited Access Trusts are an excellent vehicle for capturing the historically high federal estate tax exemption before it goes away, while retaining some control of the assets.
The purpose of the SLAT is to freeze the value of any trust assets at the value on date of transfer, excluding any appreciation from the gross estate of either spouse at death.
If both spouse’s create SLATs, their trusts attorney must take care not to trigger the reciprocal trust doctrine, which allows the IRS to an “uncross” the trusts as though each spouse created the trust for his or her own benefit. This results in the assets in the SLAT being included in each of the grantor’s estate.
Charitable Remainder Trust
A Charitable Remainder Trust (CRT) allows the grantor to transfer low basis assets to a charitable beneficiary in an exchange for an income stream for a term of years. The transfer to the irrevocable trust avoids capital gains and allows a charitable deduction.
A CRT makes economical sense in most circumstances and accomplishes a client’s philanthropic goals! The annual annuity must be at least 5% but no more than 50% of the trust’s assets. The CRT can be a Charitable remainder annuity trust (CRAT) distributing a fixed annual annuity, or a charitable remainder unitrust (CRUT) which bases the distribution on a fixed percentage of the trust assets. The former does not allow additional contributions, but the CRUT does. The term of years for the income stream cannot exceed 20 or, alternatively, can be based on the life of a beneficiary.
After the SECURE Act limited the stretch of IRAs for most beneficiaries to 10 years, many people have been advocating the CRT as a means of providing an income stream for the life of the beneficiary. Besides avoiding high income tax, the CRT as beneficiary of a retirement account is being touted as a particularly good solution for beneficiaries who are spendthrifts.
Qualified Terminable Interest Trust
A Qualified Terminable Interest Trust QTIP trust is used by married couples, most commonly with second marriages. A QTIP trust is drafted to provide monetary support for the surviving spouse during lifetime but pass to beneficiaries chosen by the grantor at the surviving spouse’s death. The magic of the QTIP trust is that it still qualifies for the marital deduction.
Property transferred from one spouse to another upon death is generally not subject to estate tax because of the “unlimited marital deduction,” which is available for most property left to a surviving spouse who is a U.S. citizen. The idea is that any estate tax is paid on the surviving spouse’s death.
Since lawyers are savvy and the IRS wants its due, certain conditions must be met to qualify for the marital deduction. One of the more significant qualifications is that the property must pass to the surviving spouse without a “terminable interest.” A terminable interest occurs when the property passes to the surviving spouse with an ownership interest that terminates during the surviving spouse’s lifetime. However, the QTIP is an exception to the terminable interest rule.
QTIP property must meet the following requirements:
The property must pass from the decedent
The surviving spouse must have a qualifying income interest for his or her entire lifetime, payable at least annually
No person, including the surviving spouse, may have the power to distribute or appoint any part of the property to anyone other than the surviving spouse during his or her lifetime
So when a QTIP election is made for a trust, the surviving spouse gets the income for life. The remaining principal in the trust is includable in the surviving spouse’s estate at death. The assets in the trust, however, pass to the beneficiaries named by the spouse who created the trust.
The QTIP trust can be drafted so that the surviving spouse can also get distributions of principal. In such cases, an independent trustee should be named (not the surviving spouse).
This strategy would not work if the surviving spouse is much younger, for example close in age to the grantor’s children - the children from the initial marriage may never actually receive any inheritance.
Medicaid Asset Protection Trust
A Medicaid Asset Protection Trust is an irrevocable trust that moves assets out of the creator’s estate to qualify for Medicaid long-term care. Neither the grantor nor a spouse can be the trustee of a Medicaid trust nor can they be beneficiaries of any principal held in the trust. A Medicaid trust can be structured so that the grantor retains a lifetime right to live in a residence held by the trust and to any income generated by the trust.
In New York State, the Medicaid Asset Protection Trust protects assets from having to be used to pay for the cost of home care if established the month before the care is needed or, in the case of nursing home care, 5 years before the skilled nursing care is needed. This allows individuals to avoid the astronomical cost of long-term care and to put in place a plan to Age in Place.
A Grantor Retained Annuity Trust (GRAT) is an irrevocable trust which allows the grantor to transfer assets to beneficiaries with little or no gift and estate tax. In return, the grantor receives the value of the principal transferred to the GRAT in annuity payments for a period of years. The interest charged is determined by the monthly assumed growth rate under I.R.C. 7520. Any appreciation of the assets above the “growth rate” is then outside the grantor’s taxable estate. A GRAT is usually structured so that the annuity is equal to what the grantor contributed, called “zeroing out”, so does not result in gift tax. At the end of the GRAT term, the asset can be distributed or continue in trust for the beneficiaries.
The GRAT make sense when the I.R.C. 7520 is low and the gifted assets have a high potential for growth.
Charitable Lead Trust
A Charitable Lead Trust (CLT) allows the grantor to avoid capital gain by donating the assets to a charitable beneficiary, which receives an annuity for a term of years, and then transfers to named beneficiaries. This is the reverse of a Charitable Remainder Trust.
Trusts Frequently Asked Questions
Let’s work together in drafting an estate plan tailored to you and your needs. If a trust makes sense - we will explore all your options. Most of the work can be done remotely via email, Zoom, and our secure client portal.
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*Please note that our office does not provide notary service to the public. If you drop in for notary, the attorney will accommodate you if possible. However, we do not under any circumstances take appointments or calls regarding notary services. Thank you for understanding.
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