Trust Planning

There are thousands of different trusts and a trust for almost every type of need. Oftentimes, four or five types of trusts get combined together in one. For example, a Life Insurance Trust is almost always set up as an “irrevocable trust”, a “Crummey Trust”, a “spousal lifetime access trust”, an “asset protection trust”, a “spendthrift trust”, and either an “age restrictions trust” or a “dynasty trust”.

The key to good trust planning is not to get bogged down in labels, but rather to make sure that you have a trust that is designed to fit your needs.

Trusts are most often established to accomplish one or more of the following goals:

1. Estate tax minimization;
2. Asset protection;
3. Minimizing probate;
4. Making sure children do not receive too much money too early;
5. Ensuring money goes in the direction you want it to go; and
6. Providing a way to control assets.

Some of the common trusts that we establish include:

1. Marital Trusts — a marital trust, also known as QTIP Trust or a 2056(b)(7) Trust, allows a person to provide money to his or her surviving spouse, defer the imposition of the federal estate tax until the death of the survivor and then guarantee that when the survivor dies, the balance goes where the first spouse would have wanted. Funds that go into a Marital Trust usually receive a step-up in basis both on the death of the first spouse to die and again on the death of the surviving spouse. A Marital Trust can be particularly useful for blended families.
2. Bypass Trusts — a bypass trust, also known as a Credit Shelter Trust or a Family Trust, is designed for a married person to leave money to his or her family in a manner that maximizes the estate tax exemption of the spouse who dies first. Sometimes, a Marital Trust and Bypass Trust are known as A-B Trust planning.
3. Age Restriction Trusts — an age restriction trust is intended to provide money to a person’s loved ones in a manner that controls the timing of distributions. For example, a person may leave money to his daughter so that she receives 1/3 of the money at age 25, 1/3 of the money at age 30, and the balance at age 35, with the trustee giving her what she needs for her Health, Education, Maintenance, and Support until she reaches age 35.
4. Dynasty Trusts — a dynasty trust is designed for individuals to leave money to their descendants in trust permanently.
5. Revocable Living Trusts — a revocable living trust, also known as just a Living Trust, is a device to manage a person’s assets during life and after death. While the Grantor is alive, the Grantor can manage his or her trust funds as the Grantor wishes. When the Grantor passes, it acts like a Will but with the added benefit of avoiding probate.
6. Special Needs Trusts — there are two types of special needs trusts, a first-party special needs trust and a third-party special needs trust. Both are designed to provide supplemental money to a person who is receiving government benefits in a way that will not cause the special needs person to lose the benefits.
7. Asset Protection Trusts — an asset protection trust is a trust designed to safeguard the assets inside the trust from creditors of the beneficiaries. If the Grantor is also the beneficiary, several states allow what is known as a self-settled creditor protection trust.
8. Irrevocable Life Insurance Trusts (ILITs) — a life insurance trust is one of the most frequently used trusts as it provides an incredibly tax efficient way to pass on wealth with few, if any, adverse tax consequences. It is designed to hold life insurance, but it can also hold other assets.
9. “IRA Stretch Trusts” — an IRA Stretch Trust is valuable for two reasons. First, it can guarantee that the beneficiaries of an IRA stretch the IRA out over the maximum amount of time allowed by law (rather than a five-year period which is required for a non-qualifying trust). Second, it can guarantee that payments be made to a spouse with the remainder going to children. This is particularly important in second marriage situations.
10. Charitable Lead Trusts (CLATS &CLUTS) and Charitable Remainder Trusts (CRATS & CRUTS) — There are many types of charitable trusts. The most common are charitable lead trusts and charitable remainder trusts. Both sets of trusts are designed to provide money to charity and beneficiaries of the grantor while obtaining sizeable tax benefits.
11. Qualified Domestic Trust (QDOT)— When there is a married couple, and one spouse dies leaving behind a surviving spouse who is not a US Citizen, there is often a need to have a Qualified Domestic Trust (QDOT) to defer estate taxes until the death of the surviving spouse.
12. Qualified Personal Residence Trust (QPRT) — A qualified personal residence trust is an arrangement to pass on wealth on a discounted basis. Basically, it works as follows: I promise to give you a house valued at $500,000 in ten years from now. Well, since you won’t be getting the house for ten years, I’m not really making a gift of $500,000 to you. The actual value of the gift depends upon the interest rate and the age of the grantor at the time of the gift. For more on this topic, please visit my Blog post on the subject:
13. Grantor Retained Annuity Trust (GRAT) — A Grantor Retained Annuity Trust is a trust for wealthier clients who wish to transfer wealth without use much, or any, of their tax exemptions. It works as follows: I promise to pay myself an annuity worth $XXX for two years. If I can invest the money at high rate, you get the excess at the end of the two years after paying me my annuity. If I can’t invest at a high rate, I just get my money back without any tax consequences. Sometimes it works to pass on wealth, sometimes it doesn’t. These trusts are frequently set up to occur every few years with highly concentrated assets to maximize the chance of success.
14. Education Trusts — Education trusts have by and large gone the way of the dinosaur. Most people are interested in a trust serving many purposes. For those that want though, there is a special trust, known as a HEET trust, that is designed to provide solely for the health and education of one’s heirs. The great benefit of this type of trust is that a gift to it will be free of all gift and generation skipping transfer taxes provided that payments are never made to individuals, but only to directly to schools and health care providers. One downside to this type of trust is that it must have a charity as a co-beneficiary and it is a bit of a grey area as to how much should actually go to charity each year. Another downside to this type of trust is that it does not allow payments for room, board and other needs.
15. Animal Trusts — For many, a pet an integral part of the family. Many states allow a person to set up a pet trust so that money can be available to pay for a home, caretaker and the medical needs of your cherished companion. It is especially necessary if you have an expensive animal such as a horse.

Kevin Pollock is the trust planning lawyer in charge of the firm’s Estate and Trust Planning Department. Attorney Kevin Pollock has focused on Wills, Trusts & Estates since 2000 when he received his master’s degree in taxation.

For more information on Trust Planning, please visit my blog: Kevin A. Pollock BLAWG