Tuesday, March 19, 2019

Trust Basics

            The creation of a trust for estate planning is a valuable tool that can be used to solve many specific needs, such as avoiding probate, reducing estate taxes, creating a charitable legacy, providing for future generations, protection of disabled or spendthrift beneficiaries, obtaining Medicaid reimbursement and other estate needs.  Depending on the issue to be addressed, specific types of trust can be created to provide for these goals.  Trusts can be complex or simple, can combine multiple outcomes, can be standalone or incorporated into a will as a pour over trust.  The most common types of trusts are as follows:

          1.       Revocable Trust.  A revocable trust that holds real and personal property with the creator or grantor of the trust serving as the trustee and initial beneficiary, with the power to terminate the trust at any time.  This is the most common and is used to reduce or eliminate the need for probate after death.  Upon the death of the grantor/trustee, a successor trust takes their place and directs the distribution of the trust assets to the grantor’s beneficiaries as directed in the trust.  A revocable trust does not provide creditor protection for the grantor or the grantor’s assets in trust.

          2.       Irrevocable Trust: An irrevocable trust is similar to a revocable trust that holds real and personal property.  However, the main difference is that the grantor is not the trustee of the trust and does not have the power to terminate or amend the trust after creation. Unlike a revocable trust, a properly created irrevocable trust can provide creditor protection for the grantor’s assets in trust.

          3.       Qualified Terminable Interest Property or QTIP Trust:  QTIP Trusts are used to gift a surviving spouse a lifetime income in an asset or property, and have the remainder pass to a third party (like children from a previous marriage), but gain the benefit of marital exemption from gift or estate tax that usually requires the surviving spouse to obtain 100% title to the asset.

          4.       Credit Shelter Trust:  Allows for the first spouse to place the value of the estate tax exemption in Trust at death with the remaining sum passed tax free to the spouse.  After the death of the surviving spouse, the beneficiaries get the sheltered funds tax free plus the surviving spouse’s funds with a full exemption as opposed to the surviving spouse getting the whole estate and then passing on a large tax bill to the beneficiaries.

          5.       Qualified Personal Residence Trust or QPRT:  A QPRT Trust allows for the owner of a valuable residence to place their home in trust for the purpose of reducing the amount of gift tax that is incurred when transferring assets to a beneficiary.  The grantor of the trust receives exclusive rent-free use, possession and enjoyment of the residence during the term of the QPRT and any tax deduction benefit for taxes they pay.  The benefit only works if the grantor outlives the term of the trust, when the property must be transferred to the beneficiaries.

          6.       Charitable Trusts:  These are irrevocable trusts that provide charitable benefits for the grantor and/or beneficiary. A Charitable Lead Trust gives the designated charity payments for a fixed term and at the end of the trust term, the remaining funds  go to the designated beneficiary tax free.  A Charitable Remainder Trust gives the trust funds to the charity subject to the charities’ obligation to pay the beneficiary income from the trust funds for up to twenty years with an income spread of not less than 5% or more than 50% of the initial fair market value of the trust’s assets

          7.       Special Needs Trust:  An irrevocable trust that allows the disabled beneficiary to enjoy the use of property that is held in the trust for his or her benefit, while at the same time allowing the beneficiary to receive essential needs-based government benefits such as Medicaid and Supplemental Security Income.

          8.       Irrevocable Asset Protection Trusts for Medicaid:  A specialized irrevocable trust created to allow the preservation of principal to prevent the loss for medical expenses that would otherwise be covered by Medicaid benefits.  The trust must be created and funded at least five years before applying for Medicaid benefits.  A child can usually serve as Trustee, and income from the trust can be paid to the grantor.

          9.       Spendthrift Trust:  A spendthrift trust is a type of trust (or a provision in a trust) that prevents the creditors of a trust reaching the beneficiary’s interest by forcing the Trustee to pay over the claimed sum.  This does not apply to federal and state taxes or an enforceable support order.

        Creation of an appropriate trust can result in substantial benefits to both the grantor and the beneficiary.  While estate taxes are not currently an issue today due to the high exemption (11 million for individuals, 22 million for couples), these exemptions can change so proper planning is still warranted.  Choosing the right attorney, financial planner and tax accountant can assist in creating the proper tools without wasting funds on unnecessary products.

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