Appendix A. Summary of Trusts

Transcription

1 Appendix A Summary of Trusts The following pages contain a brief summary, in table format, of different types of trusts. The table gives a brief description of each trust, along with its advantages and disadvantages. A.1

2 A.2 Foundations of Estate Planning Fundamental Trusts Trust General Description Revocable trust Grantor can terminate/revoke Grantor trust Income taxation to grantor without consent of adverse party Irrevocable trust Completed, nonchangeable transfers to beneficiaries Inter vivos/living trust Testamentary trust Created during grantor s life; revocable or irrevocable Contained in grantor s will; revocable until death/incapacity Simple trust All trust income distributed to beneficiaries Complex trust Trust income may be accumulated Reciprocal trust Totten trust (similar to pay-on-death (POD) and transfer-on-death (TOD) accounts) Irrevocable trust arrangement for purpose of avoidance of trust property in life beneficiary/grantor s estate; grantor is in same economic circumstances as prior to trust arrangement Bank savings account where donor makes deposit for named donee; passes at death to donee; revocable Pour-over trust Estate residue pours over into preexisting trust; trust assets may pour over to estate (less common) Sec. 2503(b) trust Allows gifts to trusts for minor beneficiaries to qualify for gift tax annual exclusion

3 Appendix A Summary of Trusts A.3 Advantages Flexibility Control Management expertise Possible transfer tax benefits Grantor s retention of controls/powers Income/transfer tax benefits for grantor Appreciation out of estate See revocable and irrevocable trusts No tax benefit Disadvantages Income taxation to grantor No income shifting Possible estate inclusion Grantor s loss of dominion and control See revocable and irrevocable trusts Revocable/amendable until death/ incapacity Separate tax entity No trust income taxation Corpus/charitable distributions Separate tax entity Trustee flexibility Variation in trust terms/purposes may accomplish exclusion of value from grantor s estate Trust property gross estate inclusion Probate property No accumulation of trust income No charitable distributions No corpus distributions Trust income taxation More complexities (DNI) Legally unenforceable if same economic circumstances for grantors Inclusion in grantors estates Convenience Flexibility Control Revocability Nonprobate Asset consolidation Management expertise Estate administration costs reduced Amendable until death Annual exclusion for income value Corpus may be kept in trust past age 21 Donee accessibility Existence of trust prior to death Probate Mandatory annual income distribution

4 A.4 Foundations of Estate Planning Fundamental Trusts (Continued) Sec. 2503(c) trust Trust General Description Allows gifts to trusts for minor beneficiaries to qualify for gift tax annual exclusion Power of appointment trust Donee/powerholder has right to designate the disposition of the property subject to the power according to trust terms; may be general power or special power Estate trust Surviving spouse has life estate; remainder payable to surviving spouse s estate Qualified terminable interest property (QTIP) trust Allows qualifying terminable interest property to qualify for marital deduction Qualified domestic trust (QDOT) Marital-deduction-type trust for transfers to noncitizen spouse Marital trust Holds assets that qualify for marital deduction; often used in conjunction with credit-equivalent bypass trust for optimal planning for the marital deduction and applicable exclusion amount Bypass trust Holds assets covered by the applicable credit/exclusion amount

5 Appendix A Summary of Trusts A.5 Advantages Annual exclusion for income value Income accumulation Flexibility Flexibility Useful dispositive device Allows delegation of dispositive decisions to another Marital deduction device Income accumulation Marital deduction device Nonproductive property allowed Grantor spouse retains postmortem control Marital deduction device Provides for surviving spouse s life Protection of heirs interests Alleviates harsh transfer tax ramifications associated with denial of marital deduction for transfers to resident-alien spouse Income/hardship distributions transfer tax free Provides for surviving spouse s life Qualifies for marital deduction Avoids stacking of assets in survivor s estate Provides optimal marital deduction/bypass tax savings Disadvantages Mandatory distribution of income and principal at age 21 Inclusion in minor beneficiary s estate Possible tax consequences for donee Annual or more frequent income distributions Income-producing property required (generally) Accumulated income in surviving spouse s estate Reachable by creditors Increased administrative costs possible Mandatory annual (at least) income distributions Inclusion in surviving spouse s estate Income-producing property required (generally) Complex Inflexible Administratively expensive Restrictive May provide inadequate support for surviving spouse if improper formula is used with creditequivalent bypass trust due to increasing applicable credit/exclusion Inclusion in surviving spouse s estate Increasing applicable exclusion amount may undermine marital trust value

6 A.6 Foundations of Estate Planning Fundamental Trusts (Continued) Trust Grantor-retained annuity trust (GRAT) Grantor-retained unitrust (GRUT) Qualified personal residence trust (QPRT) General Description Provides right to receive fixed payments at least annually for a life/lives or for a term of years followed by remainder to trust beneficiaries Provides right to receive fixed percentage payments (as revalued annually) annually for life/lives or for a term of years followed by remainder to trust beneficiaries Allows grantor to retain control over/reside in home for term of years when home then passes to beneficiaries at reduced gift tax cost Charitable remainder annuity trust (CRAT) Charitable remainder unitrust (CRUT) Provides noncharitable income beneficiary with a fixed annuity of at least 5 percent annually of initial fair market value for term or life/lives; remainder to charity Provides noncharitable income beneficiary with fixed percentage of at least 5 percent of net fair market value (revalued annually) for term or life/lives; remainder to charity Charitable lead annuity (CLAT)/ unitrust (CLUT) trust (guaranteed annuity/ unitrust interest trust) Generation-skipping transfer tax trust Revocable life insurance trust (RLIT) Reverse of remainder trusts, CRAT/CRUT; income interest passes to charity at least annually for term or life/lives; remainder to noncharitable beneficiaries Created for benefit of individuals two or more generations below transferor (grandchildren/skip beneficiaries and no nonskip beneficiaries): taxable distributions/taxable terminations Created to hold life insurance during lifetime for estate enhancement often by young grantor or for pour over of estate assets at grantor s death

7 Appendix A Summary of Trusts A.7 Advantages Subtraction method of valuation (Sec. 7520) Transfer tax savings Appreciation out of grantor s estate Subtraction method of valuation (Sec. 7520) Transfer tax savings Appreciation out of grantor s estate Subtraction method of valuation (Sec. 7520) Transfer tax savings Grantor has home for term Appreciation out of grantor s estate Transfer tax benefit for partial interest charitable transfer Estate tax charitable deduction Allows provisions for noncharitable beneficiaries Transfer tax benefit for partial interest charitable transfer Estate tax charitable deduction Allows provisions for noncharitable beneficiaries Additional contributions to trust allowed Remainder interest stays in family Income/transfer tax benefits Disadvantages Tax benefits diminished by grantor s death during term Tax benefits diminished by grantor s death during term No tax savings if grantor does not survive term Remainderperson control after term Loss of dominion/control over remainder interest Some complexities Loss of dominion/control over remainder interest Some complexities Inclusion of remainder for noncharitable beneficiary Lifetime and at-death exclusion Annual exclusion availability Leveraging availability Gift-splitting potential Flat, highest estate tax rate for year of transfer applies Complex Greater administrative expense Estate enhancement Flexibility Control Revocable Nonprobate No tax benefits Insurance proceeds included in grantor s gross estate

8 A.8 Foundations of Estate Planning Fundamental Trusts (Continued) Trust Irrevocable life insurance trust (ILIT)) General Description Trust owns life insurance policy(ies) on grantor-insured s life; at insured s death, proceeds pass according to trust terms Grandparent-grandchild trust Grandparent grantor creates trust to hold life insurance on life of grandchild s parent for benefit of grandchild

9 Appendix A Summary of Trusts A.9 Advantages No inclusion of proceeds in insured s gross estate Transfer tax savings Passes value to beneficiaries outside grantor s estate Leverage of applicable credit/ exclusion Estate liquidity Reduction of grandfather s estate Enhances amount grandchild receives at parent s death Reduces life insurance child carriers Avoids transfer taxation No incidents of ownership Disadvantages Loss of control Careful avoidance of incidents of ownership Order of deaths uncertain Loss of control

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