Trusts are probably the single most versatile estate planning tool. Simply stated, a trust is an instrument set up by you (called the "Grantor" or "Settlor") which appoints a second individual or institution (called the "Trustee") to administer assets for the benefit of a third individual or individuals (called the "Beneficiaries").
Trusts are the magical weapons that can be used to manage your assets, avoid probate, preserve assets for your children and grandchildren and save significant estate taxes. Here is an overview of trusts that we typically use in our representation of our clients to great advantage:
- Revocable Living Trust - used as a Will substitute to manage assets, preserve privacy of contents and avoid probate.
- Bypass (Credit Shelter ) Trusts - used in Wills or Revocable Trusts to save significant estate taxes for married couples. THIS TRUST SHOULD BE USED IN VIRTUALLY EVERY ESTATE PLAN FOR MARRIED COUPLES WITH MORE THAN $1,000,000 IN ASSETS.
- Marital (QTIP) Trusts - used to obtain marital deduction for assets passing to a spouse and to preserve assets for children after death of spouse. This trust is vital in second marriage situations. Because of the new state-only "QTIP" in Maryland, married couples who reside in Maryland should have both a "federal QTIP" and a "Maryland-only" trust in their testamentary documents to maximize estate tax savings.
- Disclaimer Trusts - this is a trust set under a Will or Revocable Trust that provides an estate plan with the flexibility to allow estate planning after death! It is a trust that is set up in a Will or under a Revocable trust, but becomes effective only if the survivor (typically the surviving spouse), upon the advice of counsel, disclaims certain assets. This trust is very versatile and flexible and can achieve great results in the desired situation. We use these trusts in a variety of situations, the most common of which is where the client's situation is in a state of flux with respect to asset or family structure. For instance, this trust is used widely for "Yuppies" whose asset structure is likely to fluctuate significantly over time. We also employ this trust as an invaluable tool for drafting a flexible estate plan to take into account the changing federal exemption and the new “decoupled” Maryland estate tax.
- Generation-Skipping Trusts - used for clients who have a high net worth (or whose children who have a high net worth) to save taxes in the next generation. THIS IS THE KEY METHOD TO REDUCE INTER-GENERATIONAL TRANSFER TAXES IN WEALTHY FAMILIES. This type of trust usually makes assets and income available to the children during their lifetime, but ultimately the corpus would pass to the grandchildren and skip the children's estates for estate tax purposes.
- Dynasty Trusts - this is a form of Generation-Skipping Trust that could avoid estate taxes in many generations. IN MARYLAND, THIS TRUST CAN NOW LAST FOREVER DUE TO A RECENT CHANGE IN LAW - IT IS A HIGHLY EFFECTIVE TAX SAVINGS TOOL FOR HIGH NET WORTH FAMILIES.
- HEET Trusts - used by grandparents to fund educational expenses for grandchildren and great-grandchildren without using generation-skipping tax exemption.
- Life Insurance Trusts - used to keep life insurance proceeds out of estate and save significant estate taxes. For many, life insurance proceeds comprise a significant portion of one's estate. Failure to place a policy in a trust could engender significant estate taxes.
- Minor’s Trusts - used to preserve assets for minor’s until specified ages. This is key because under state law, the minor would be entitled to ownership of assets at ages 18 or 21. Minor's trusts can be structured as separate trusts for each child or as one "pot" trust for all children. We will review the advantages and disadvantages when we meet.
- Qualified Subchapter S Trusts and Electing Small Business Trusts - used to hold stock in a “Subchapter S” corporation. Without this trust, “S” status could be lost with disastrous consequences to the business entity. Indeed, certain "savings" provisions should be inserted in each Will where the client owns an interest in an "S" corporation.
- Qualified Personal Residence Trusts (QPRT) - used to save significant taxes by transferring ownership of a residence to a trust. This can be used for one's residence or primary residence. It is a trust which can produce extraordinary estate tax savings.
- Special Needs Trusts - used to hold assets for a beneficiary with “special needs.” The primary purposes are for management of assets and to preserve government entitlements for the beneficiary with special needs.
- Grantor Retained Annuity Trusts (GRAT) – used to save estate taxes by transferring property to a trust while the donor retains the right to income for a fixed term of years; provides donor with opportunity of “leveraging” the gift if property outperforms the annuity payout.
- Intentionally Defective Grantor Trusts (IDGT) – used to effect a completed gift for estate and gift tax purposes, thereby removing the property gifted or sold from an individual’s estate, but not removing the property for income tax purposes (and therefore enabling the grantor to pay income taxes without further gift).
- Charitable Remainder Trusts (CRT) – used as a vehicle to effect a transfer of assets (cash, securities, etc.) in a trust. The trust then provides annual income payments to the donor or a named beneficiary for a fixed period of time, or until the death of the beneficiary. At that time, the remaining assets are transferred from the trust to the charity. Offers current income tax deduction and reduction of capital gains on sale of appreciated asset in the trust.
- Charitable Lead Trusts (CLT) – used as flip-side to CRT where charities become the income beneficiaries, receiving a steady stream of income during the donor’s lifetime. At the donor’s death, named beneficiaries then receive the bulk of the CLT's assets. Useful to high net worth donors for removing value of assets from estate where current cash flow is not needed.
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