Revocable Living Trust
A revocable living trust is a trust created by you as the settlor during your lifetime. You are the initial beneficiary and the initial trustee. The trust terms are extremely flexible and can accommodate a variety of objectives. If assets are transferred to the trust, you will avoid the need to open a probate upon your death or incapacity.
The ability to avoid judicial supervision upon incapacity can not be overlooked. Without a fully funded trust, your loved ones will be required to submit paperwork and periodic financial information to the Probate Court, thus incurring additional costs and expenses along the way. With a fully funded trust, there is no need for judicial supervision unless a dispute arises.
The trust can also address many issues caused by non-traditional families and other issues upon death. Assets can be divided among several sub-trusts to achieve a wide variety of objectives.
If you would like more information on trusts, or would like us to create a trust for you, please give us a call at 480-281-1512 or fill out the form on the right.
Other Types of Trusts
The marital deduction trust is more of a tool for deferring estate taxes, rather than saving estate taxes, for married couples. The marital or QTIP trust is drafted as part of your will or revocable trust. The trust must provide that all income be distributed to the surviving spouse and that the surviving spouse must make the election to treat the assets in the trust as part of their estate upon her death. Hence the estate tax is deferred from the date of the first spouse to die to the date of the second spouse. Upon the first spouse’s death, the trust is irrevocable. The most common use for the marital deduction trust is for a spouse who does not want the survivor to be able to modify the beneficiaries of the amount over the estate tax exclusion. Another common use is for lifetime transfers to a marital deduction trust to take advantage of a poorer spouse’s estate tax exclusion. Special rules apply for non-citizens, so care must be taken in drafting trusts for these individuals.
For spouses, a very common estate tax planning tool is a credit shelter trust, otherwise known as a bypass or “B” trust. This tool is drafted into your will or revocable trust and is funded upon the death of the first spouse. The bypass trust is funded with assets valued at equal to or less than deceased spouse’s estate tax exclusion. The terms of the trust are irrevocable by the surviving spouse. The surviving spouse can receive income and principal distributions from the bypass trust. These distributions can be a mandatory, at the trustee’s discretion or a set percentage of trust assets (i.e. a unitrust). Properly drafted, the surviving spouse can be the trustee and still retain the estate tax benefit. The benefits of the credit shelter trust include: (i) the desirability of omitting future appreciation from the surviving spouse’s estate, (ii) being able to include persons other than the surviving spouse as a trust beneficiary, (iii) avoiding (or minimizing) inequities in a blended family situation, (iv) the desire for asset protection planning and (v) using the deceased spouse’s GST exemption. For estates larger than $10,000,000, the creditor shelter will usually be the better option. By contrast, estate tax portability can be relied on for couples whose estates are in the range of $4,000,000 to $10,000,000. Portability is usually more effective for estates who would otherwise leave their assets directly to the surviving spouse.
Charitable remainder trusts are viable techniques to lower income and estate taxes, yet still retain some benefit from the assets during your life. A charitable remainder trust is an irrevocable trust. The donor retains the right to the income from the assets transferred to the trust and upon her death, the assets are transferred to the charitable organization. The CRT pays no income tax on its income. Therefore, the CRT is not taxed on any gain it realizes upon selling appreciated property whether donated by the grantor or appreciation occurring after donation. The donor is entitled to an immediate income and gift tax deduction in the amount of the present value of the remainder interest passing to charity. The estate of the decedent who created a testamentary CRT is entitled to an estate tax deduction for the present value of the remainder interest passing to charity. There are four types of CRT: 1. Fixed percentage unitrust (CRUT). The recipient receives the fixed percentage of the trust assets, valued annually. 2. Lesser of Income or Fixed Percentage Without Make-Up (NICRUT). The recipient receives the lesser of the trust’s net income for that year or the fixed percentage of the trust assets valued annually. 3. Lesser of Income or Fixed Percentage With Make-Up (NIMCRUT). The recipient receives the lesser of the trust’s net income for that year or the fixed percentage and in a year when the trust’s net income exceeds the fixed percentage, that excess is used to make-up for past deficiencies in years when the net income was less than the fixed percentage. Typically, under state trust accounting law, income excludes capital gains (i.e., capital gains are allocated to principle). 4. Flip CRUT. A Flip CRUT is a CRUT where the initial unitrust amount to the recipient is the lesser of income or the fixed percentage; and where after a triggering event, the unitrust amount changes (i.e., flips) to the fixed percentage. The following requirements must be satisfied to use the Flip CRUT: (1) the change (flip) from the NIMCRUT (or NICRUT) to the fixed percentage CRUT is triggered on a specific date or by a single event whose occurrence is not discretionary with, or within the control of, the trustee or any other person; (2) the flip occurs at the beginning of the taxable year that immediately follows the taxable year during which the triggering event/date occurs; (3) following the flip, the CRT becomes a fixed percentage CRT (and any makeup account is forfeited). A triggering event based on the sale of unmarketable assets or the marriage, divorce, death, or birth of a child with respect to any individual will not be considered discretionary with, or within the control of, the trustees or any other person. For purposes of a flip CRUT, unmarketable assets are assets that are not cash, cash equivalents, or other assets that can be readily sold or exchanged for cash or cash equivalents. When the unmarketable asset is sold, the CRUT flips and then the year following the year of sale the unitrust amount is a fixed percentage.
The intentionally defective grantor trust (IDGT) is another estate freezing device. The grantor creates a trust which is defective for income tax purposes (meaning the grantor is still taxed on the income of the trust) but is effective to remove the assets in the trust from the grantor’s estate without gift tax consequences. The grantor funds the trust with a gift of seed money and then sells assets (such as stock in a closely held or family business, real estate, marketable securities, limited partnership interests) to the trust in exchange for an installment note with interest. The installment note may be payable in installments over a term of years with a balloon or an interest only note with a balloon payment on the due date. If the note uses the Applicable Federal Rate, no gift is made to the trust other than the initial seed money. When the grantor dies, only the fair market value of the note is included in the grantor’s estate. That value will be less than the outstanding principal of the note depending on several factors, including the payout of the note, the interest rate, the absence of security, default provisions, covenants and other note terms. Any increase in value of the sold assets will not be taxed in the grantor’s estate and will inure to the benefit of the trust beneficiaries. There is no statutory authority for this technique. The benefits created by this technique are the result of inconsistent language between the income tax code and the estate tax code. While the IRS has acknowledged the tax treatment of this structure in private letter rulings, there is no reliable support for its use. Therefore, you should carefully review your alternatives before entering into this type of transaction.
The Grantor Retained Annuity Trust (GRAT) is a technique used in a large estate to transfer assets to a younger generation which are likely to appreciate more than the rate the IRS uses to value retained interests (the 7520 rate). An irrevocable trust is created by the settlor. The settlor can be the trustee and can retain all the income tax obligations for the trust. The settlor contributes an asset to the trust and retains the right to receive distributions from the trust slightly less than the value of the contributed asset plus the 7520 rate. In a perfect world, the asset appreciates and any excess value remains in the trust for the other beneficiaries. The IRS dislikes these transactions and for the last several years has listed them as a technique that it may impose restrictions on or eliminate altogether. However, under the right circumstances, this technique currently can achieve significant estate tax savings.
Life insurance is an important part of your financial security. Unfortunately, a large life insurance policy that is included in your estate for estate tax purposes can increase your estate tax obligation upon death. The Irrevocable Life Insurance Trust (ILIT) can solve this issue. An irrevocable trust is formed with someone other than the insured as trustee. The beneficiaries can be a spouse or other family members. The trust applies for the insurance and is the owner and beneficiary of the policy. Each year the insured makes a gift to the trust using his or her annual gift tax exclusion. The trustee receives the gift, gives notice to the beneficiaries and then uses the gift to make the premium payment on the policy. Upon the insured’s death, the proceeds of the policy are paid to the trust and then held or distributed pursuant to the terms of the trust. If drafted and implemented correctly, the assets of the trust are excluded from the insured’s estate.
How To Revoke An Irrevocable Trust
An offshore trust is a viable technique for the very wealthy to park their “emergency fund” offshore and away from creditors. To be effective, the planning must be done well in advance of any liability being incurred. The process involves creating a trust in an owner friendly foreign jurisdiction and transferring assets to the trustee in a sufficient amount where the annual income from the assets transferred will pay for the annual costs of administering the structure. There a many foreign jurisdictions available and each has its own pros and cons. Determining which jurisdiction is appropriate for your circumstances is difficult as you must investigate the laws of each. Review the statute of limitations on claims and the process for bringing a lawsuit and their exceptions. While each jurisdiction has different laws, the basic offshore trust structure looks like this. The trust is drafted to allow you unlimited access to the assets in the trust while there is not a financial constraint on you. However, it also allows the foreign trustee to turn off any distributions if you have financial or creditor issues. During this time, the trustee accumulates the income and principal of the trust until such time as the financial crisis has passed or the creditor is satisfied. Most jurisdictions require the creditor to file a claim in the foreign jurisdiction within relatively short time frames. The technique is designed to make it difficult for a creditor to attach the assets transferred so you are able to negotiate a favorable settlement. Real estate and businesses operating in the U.S. are not good assets to transfer as those assets will necessarily be operating in the U.S. and subject to a U.S. court’s authority. However, the portion of your investment portfolio that is allocated to foreign assets are great assets to transfer. Planning for and administering an offshore trust is complex and must be coordinated between your lawyer, accountant, insurance advisor and foreign trustee.
Additional Info On Trusts
How To Fund Your Trust