Trusts

A trust is a legal document which assures that a decedent’s property and assets are transferred to his or her heirs according to their wishes. A Trust ensures more privacy because it does not have to go through the court (probate) system and the distribution is often more timely. There are also tax advantages for those persons with a greater net worth. Further, the terms of a trust are typically not disclosed to the public, wheras the terms of a will become public record at your death.

Keep in mind that although there are significant advantages to a trust over a will, a trust generally costs more to establish than a will. One should consult with a competent attorney to decide what is right for him or her.

With a trust, the person who establishes the trust manages his or her property before death or incapacity, as well as provides how trust assets and the income earned by the trust are distributed after death. If you become incapacitated or disabled, the trust is in place to manage the financial affairs, usually by your named successor trustee. Therefore, a trust provides for more comprehensive disability planning which, unfortunately, is a frequent occurrence.

However, even with a living trust, you still need a “pour-over will” as backup for assets not vested in your trust which may be probated.

Common Types of Trusts

Revocable Living Trust

The trust contains provisions which are in effect during the lifetime of the person who established the trust. The ownership of assets can be transferred to the trust while you are alive. As the Settlor of the trust, you may act as trustee and keep any or all of the income, change any provisions and/or terminate the trust. You may name a successor trustee to take over the responsibilities of the trust should you become physically or mentally disabled. A major advantage of the Revocable Living Trust is that the assets in the trust are not subject to probate proceedings.

Bypass or Credit Shelter Trust

To take advantage of the estate tax exclusion, this trust ensures that both spouses may utilize this exclusion without the direct transference of assets to other beneficiaries until both spouses are deceased. After death the assets equal to the estate tax exclusion amount are placed in the trust. The remaining spouse may utilize the trust income and in specified circumstances and some or all of the trust principal, while assuring that the remaining assets are transferred to the remainder beneficiaries after the death of the surviving spouse. Amounts placed in the trust should be reviewed periodically. The exclusion amount for estate taxes in 2015 is $5,430,000 per person.

Qualified Terminable Interest Property Trust (QTIP)

When assets exceed the amount which can be funded to a bypass or credit shelter trust, the QTIP trust can be used when a surviving spouse wants to maintain control and utilization of these assets. Income from the QTIP trust is typically distributed during the lifetime of the surviving spouse. Estate taxes are not due on these funds at the time of the first spouse’s death as this amount qualifies for an unlimited marital deduction. After the surviving spouse’s death, the trust corpus (principal) will be distributed to the designated beneficiaries of the first spouse. The QTIP trust is most often used to protect children of a previous marriage. Also, if a surviving spouse remarries, her/his new spouse will not inherit any assets of this trust.

Irrevocable Life Insurance Trust (ILIT)

Most people presume that life insurance is not included in one’s estate at death. This is not the case, even if the beneficiary is other than the spouse or family. An ILIT allows for proceeds from a life insurance policy to be excluded from a decedent’s estate. The insurance policy often times is held by the ILIT to help pay estate taxes. Gifts of cash are generally made annually to the ILIT so the trustee of the ILIT can pay the insurance policy premium. Proceeds from the trust are distributed after death according to the terms of the trust. Utilizing an ILIT as an estate planning strategy should be undertaken with the advice of an attorney with knowledge of the estate tax laws. If the insurance funds are not needed for estate tax purposes, the policy amount can be utilized for further bequests to beneficiaries or for philanthropic purposes.

Charitable Remainder Trust (CRT)

A CRT can be used to avoid a large capital gains tax bill by transferring an asset which has a low basis but has appreciated in value significantly and can allow the donor a charitable income tax deduction in the year of bequest. Because the trust is established as a tax-exempt entity, the donated assets is sold without accruing any capital gains taxes and the proceeds are then reinvested. This results in an immediate charitable contribution which will equal the property’s present value which the charity will receive upon termination of the trust. The income from the trust will come to you; however, the charity will receive the principal upon termination of the trust.

Qualified Personal Resident Trust (QPRT)

When placing your home or vacation home in an irrevocable QPRT, you retain the right to live in your home for a designated number of years. Upon termination of the trust, the ownership of the home(s) is passed to your beneficiaries. The value of the house when transferred to the trust will determine the amount of the gift tax. At the time of the transfer, the value of the home is discounted to its true present value, based on the term of the trust (e.g. 10 years; 15 years). The home is included in your estate at its current fair market value if you die before the trust is terminated. This trust allows you to leverage the use of your lifetime gift tax exclusion.