Many of us may perceive trusts as a complex subject better left to
our attorney. However, a trust is simply a contract initiated by a grantor who
agrees to transfer assets to a beneficiary,
who then receives the assets as stipulated in the trust contract. A trustee, who may also be
the grantor, manages the trust assets and ensures the stipulated terms of the
trust are faithfully executed.
A
trust is designed to help individuals manage a variety of family and
tax-related estate planning concerns. Here are a few ways in which trusts can be
used:
Revocable Living Trust. A revocable living trust
is an estate planning trust that deeds property to an heir but allows the
grantor to retain control over the property during his or her lifetime. Upon
the grantor’s death, the property passes to the beneficiary, avoiding probate,
which is the judicial process wherein a court appoints an executor to carry out
the provisions of a will. While the revocable living trust does not provide tax
savings for the grantor during his or her lifetime, the trust becomes
‘irrevocable’ upon death, and the beneficiary is then entitled to tax
advantages.
Irrevocable Living Trust. An irrevocable living
trust is an estate planning trust wherein the grantor does not retain control
of assets or property. Through the transfer of assets or property into the
trust, the grantor may be eligible for certain tax savings. An irrevocable
living trust may also be used to avoid probate.
Irrevocable Life Insurance Trust
(ILIT). An irrevocable life insurance trust is designed to provide tax
savings through the ownership of a life insurance policy. Assets in the trust
are generally not considered part of the grantor’s estate. ILITs may be funded
or unfunded. With a funded
ILIT, income-generating assets are transferred into the trust, and the
generated income is then used to pay the premiums on the life insurance policy.
With an unfunded
ILIT, the grantor makes yearly gifts to the trust, and this money is then used
to pay the premiums on the life insurance policy.
Credit Shelter Trust: A credit shelter trust,
also called a bypass trust,
is an estate planning tool used to protect assets from successive estate taxes.
While current law permits an unlimited amount of assets and property to pass to
a surviving spouse without being subject to Federal estate taxes, children and
other beneficiaries must pay taxes for inheritances valued in excess of the
applicable estate tax exclusion amount. If a married couple wishes to take advantage of a credit shelter
trust, they generally arrange for certain assets to pass into the trust for the
benefit of the surviving spouse, rather than passing all assets directly to the
spouse. This trust, which would not
be considered part of the surviving spouse’s estate—and generally does not
exceed the applicable exclusion amount—may pay the surviving spouse income for
life and then, upon his or her death, may pass to a beneficiary, such as a
child, free of estate taxes if under the exclusion limit.
Charitable Remainder Trust (CRT): A charitable remainder
trust is an arrangement in which assets are donated to a charity but the
grantor continues to use the property and/or receives income from it. A CRT may
allow the grantor to avoid capital gains taxes on highly appreciated assets;
receive an income stream based on the full, fair market value (FMV) of those assets;
receive an immediate charitable deduction; and ultimately, benefit the charity
of his or her choice.
Dynasty Trust: This trust is often
used by individuals to pass wealth to their grandchildren free of generation-skipping transfer taxes.
A
trust can be an effective way to accomplish your long-term estate planning
goals but often involve complicated tax laws. Consult with your tax and legal
professionals about your particular situation and how a trust may enable you to
share your wealth with family, friends, or charities.
