In the previous post, I described how trusts can be part of everyone’s estate planning (besides Jason Bourne). There are essentially two types of trusts: living trusts and testamentary trusts. In this post I’ll provide you with some information about certain types of living trusts.
Living trusts (also called inter-vivos trusts) are set up during the grantor’s lifetime. They can be either revocable (changeable by grantor) or irrevocable (cannot be changed by grantor).
The following are some examples of living trusts:
Revocable Trusts are a popular probate avoidance device. The grantor is the individual who contributes the assets to the trust, is the trustee, and the beneficiary of the trust during their lifetime. The terms of the trust directs the disposition of the assets of the trust after the grantor dies. The grantor reserves the right to amend or revoke the trust at any time. Because of the extensive controls and rights of the grantor, they are ignored for both income and estate tax purposes (i.e. they do not save or avoid any income taxes or estate taxes which the grantor would otherwise pay). The key advantage to these trusts are: (i) that the assets of the trust are not subject to the probate process or its attendant fees and costs; and (ii) they are “private” in that there is no requirement to file them with the Court when the grantor dies. Even if a grantor establishes a revocable trust they should still have a Will so that any of the assets which the grantor did not previously transfer to the trust would become part of the trust aftert the grantor’s death.
Irrevocable life insurance trusts (ILIT) can be established to remove the proceeds of life insurance from your taxable estate. Once established, an ILIT is generally not subject to change by the grantor. The ILIT itself owns the insurance policies (and all the incidents of ownership), receives the proceeds when the grantor dies, and distributes the proceeds in accordance with its terms. The grantor can transfer presently existing policies to the trust (which remain part of the grantor’s taxable estate for 3 years) or the trust itself can apply for, and buy, a “new” policy on the grantor (which are immediately excluded from the taxable estate). The funds or the insurance policies that the grantor contributes to establish this trust are considered to be a “gift” for gift tax purposes.
Charitable remainder trusts (CRT) present a unique opportunity for those with a charitable intent. The grantor retains a right to payment from the trust (either a fixed payment or a percentage of the assets) for a period of time or the death of the grantor (whichever comes first), and thereafter the assets go to charities designated by the grantor. Although the payments to the grantor MAY be subject to income tax (depending on the composition of the assets and the amount of the payments), the grantor gets a charitable deduction upon funding the trust, and any capital gains from the CRT’s sale of assets are attributed to the charity rather than the grantor (hence, these are often funded with appreciated which are promptly sold by the CRT and re-invested). Grantors of CRTs often use the tax savings from the charitable deduction to purchase a life insurance policy which “replaces” the assets transferred to the CRT.
Look for our Part Two follow-up post on the second type of trusts: Testamentary trusts.
By their very nature, trusts are complicated. These blogs are designed to give you an overview which should not be construed as legal advice. If you would like more information on these matters, you can contact us at firstname.lastname@example.org or 515-727-0900 to arrange an appointment.