Estate Planning
for Financial Planners
Chapter 8:
Trusts
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Introduction
 Used for:
 Management of assets.
 Flexibility in the operation of the estate
plan (except charitable trusts).
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Updated on 12/12/06
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Parties



Grantor (a.k.a. settlor, creator, trustor)
 Person who creates and initially funds the trust.
Trustee
 Manages the trust and carries out the provisions in the
trust document.
 Must act in the best interest of the beneficiaries.
• Duty of loyalty and care
• Corporate trustee if you need a “bad cop” for problem
child
Beneficiary
 Income – right to income.
 Remainder – right to property when trust terminates.
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Why Use a Trust?
(1 of 3)
 Management
 Assist those not capable of managing assets.
 Creditor protection
 Spendthrift clause
• States beneficiary cannot assign, pledge or
promise to give the assets of the trust to
anyone, and if a promise is made, it is void.
 Also should allow the trustee to make
distributions on a discretionary basis.
 Most states do not allow the grantor to create a
spendthrift trust for protecting his assets.
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Why Use a Trust?
(2 of 3)
 Split interests in property
 Valuable asset that grantor does not want to sell or
split up (e.g., gifting farm to 5 kids where only 2 will
participate).
 Avoid probate (living trust)
 Revocable living trust – managed by the grantor and
is for the benefit of the grantor during lifetime.
 Becomes irrevocable at death.
 Does not avoid estate taxes.
 Avoid taxes
 Transfer future appreciation.
 Avoid transfer tax on subsequent generations.
 Reduce gross estate
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Trust Duration – The Rule
Against Perpetuities
 All interests in the trust must vest within lives in
being plus 21 years.
 Some states have adopted statutory rule against
perpetuities (90 years).
 IRS recognizes both rules.
 Some states have abolished the rule but include
laws that prohibit the trust from not allowing the
trustee to sell property.
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Taxation of Trust
(1 of 2)
 Income tax – Hybrid entities
 Distributed – Taxed to beneficiaries.
 Accumulated – Taxed at trust rates.
 Simple trust – mandates distribution
of income.
 Can not distribute corpus
 Complex trusts – permits
accumulation of income.
 Capital gains part of income
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Taxation of Trust
(2 of 2)
 Revocable – not a completed gift
 Irrevocable – generally completed
(unless retained interests)
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Classification of Trust
Arrangements
 Revocable trusts
 Avoids probate.
 Provides for management of the grantor’s
assets if grantor is incapacitated.
 Irrevocable trusts
 Used to achieve estate and gift objectives.
 Inter vivos trust
 Created during life.
 Testamentary trusts
 Created at death.
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Classification of Trust
Arrangements
 Standby trust
 Unfunded or minimally funded.
 Waiting for triggering event – usually incapacity.
 Pourover trust
 Receives assets from another source.
 Grantor trust
 Inter vivos trust for the grantor.
 Grantor pays all income tax.
 Funded or Unfunded
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Specific Trusts Used in
Estate Planning (1 of 8)
 Inter Vivos Revocable
 Important in states with high probate
costs.
 Privacy is maintained.
• No notice requirements.
• Terms are confidential.
 Will contests are discouraged .
• State law controls, but generally more
difficult.
 NOT effective for reducing estate taxes.
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Specific Trusts Used in
Estate Planning (2 of 8)
 Inter Vivos Irrevocable
 Completed gift!
 Use annual exclusion – remember need
present interest.
• Distributions of income are considered a
present interest.
• Crummey – letter sent to guardian
• 30 days to exercise right
• Multiple beneficiaries, multiple exclusions
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Specific Trusts Used in
Estate Planning (3 of 8)
 Life Insurance (ILIT)
 Need present interest.
 Bypass (Credit Shelter or B) Trust
 Spouse can still get the income, HEMS, “5and-5.”
 Usually Testamentary, but can be Inter
Vivos and exclude future appreciation.
 Power of Appointment Trust
 Generally used to take advantage of the
unlimited marital deduction.
 May be used to avoid GSTT.
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Specific Trusts Used in
Estate Planning (4 of 8)
 Qualified terminable interest property
(QTIP) trust (Also called the “C” or “Q”
trust)
 Used to take advantage of the unlimited
marital deduction.
 Grantor
Retained
Trusts (GRITs)
Income/Interest
 Grantor retains an interest in the trust
(usually an income interest).
 GRATS, GRUTS, QPRTS, TPPTs.
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Special Trusts Used in
Estate Planning (5 of 8)
 Grantor Retained Annuity Trusts (GRATs)
 Fixed percentage of the initial contribution for
life or for a term of years.
 Based on Section 7520 rate


2.2% as of January 2014
Lower rate = lower payments to grantor
 Excess earnings above 7520 rate and
appreciation during trust term are go to trust
beneficiaries (usually kids or grandkids)
 But no gift tax implications
 Works great with an asset that has declined in
value but has a good chance of recovering value
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Special Trusts Used in
Estate Planning (5 of 8)
 Grantor Retained Annuity Trusts (GRATs)
 If trust “fails” (doesn’t earn 7520 rate), no
downside.
 Grantor gets assets back
 No different that if he never transferred them to
trust
 If the grantor dies within the trust term, the
FMV of the trust property is brought back into
the gross estate.
 So short-term GRATs of two years are common
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Special Trusts Used in
Estate Planning (6 of 8)
 Qualified Personal Residence Trusts (QPRTs)
 Personal residence trust.
 Tangible Personal Property Trusts
 Personal property – artwork, antiques, etc.
 Dynasty Trusts
 Long periods of time.
 Used to avoid transfer tax at the death of each
generation.
 Grantor Trusts
 Income taxed to grantor.
 Completed transfer for gift and estate tax purposes.
 Incomplete transfer for income tax purposes.
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Updated on 12/12/06
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Special Trusts Used in
Estate Planning (7 of 8)
 Trusts for minors – Sec. 2503(b) and Sec. 2503(c)
trusts.
 Minors are not generally permitted to own property.
 2503(b) – May hold assets for beneficiary’s lifetime
but must distribute income annually.
• Annual exclusion available for the PV of the
income interest.
 2503(c) – Allows income to be accumulated but
assets must be available to child when they turn 21.
• Annual exclusion available for the contribution.
 Crummey trust
 Discussed previously.
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Special Trusts Used in
Estate Planning (8 of 8)
 Charitable trusts
 Discussed in Chapter 9.
 Totten trusts
 POD accounts (not really trusts).
 Blind trusts
 Revocable trust used when self
management might be a conflict of
interest (e.g., a politician).
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Updated on 12/12/06
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