In part 1 of this article we discussed the general categories of testamentary trusts, revocable and irrevocable living trusts, Irrevocable Life Insurance Trusts, Charitable Remainder Trusts, Grantor Retained Interest Trusts, and Qualified Personal Residence Trust. (click here for part 1 of this article). In this article we will continue to give an overview of the types of special trusts that are available to accomplish your estate planning goals.
Allows a grantor to reduce their estate tax burden and transfer assets to a minor child. A grantor usually funds these types of trusts with their annual gift exclusion. Also, by using a trust, the grantor can put rules on when the minor will receive the money in the trust outright. This is an irrevocable trust.
Credit Shelter Trust/ AB Living Trust/ Bypass Trust/ Family Trust
Credit Shelter Trusts were popular prior to 2012, as they allowed a both members of a married couple to fully use their estate tax exemption. As of 2012, the executor of a deceased spouse’s estate could make an election on the estate tax return that allowed the surviving spouse to use the deceased spouse’s unused estate tax exemption. This took away one of the Credit Shelter Trust’s key benefits. These types of trusts still have some benefits including extending control and maintaining the exemption is the surviving spouse remarries.
By bequeathing assets into a trust rather than directly to their heirs, a client can create a way to avoid future estate tax. The assets left to future generations never goes into the estate of those future generations, escaping diminishment through estate tax and generation skipping tax. New York does not allow these type of trusts, but New Jersey does.
Qualified Domestic Trust
Clients who have a non-citizen spouse do not get to use the unlimited spousal deduction for transferring assets tax-free to a spouse. By transferring assets into a Qualified Domestic Trust and complying with a number of IRS regulations, the non-citizen spouse can receive income and principal from the trust, without those assets being subject to estate tax until after the surviving spouse dies.
Qualified Terminal Interest Property Trust
This type of trust is sometimes valuable for families with divorces, remarriages or step-children if the funder wants to direct assets to particular beneficiaries. The surviving spouse receives income from the trust, but does not get to decide where the trust assets go upon the surviving spouse’s death. Assets put into a Qualified Terminal Interest Property Trust is subject to estate tax.
Special Needs Trust/ Supplemental Needs Trust
A grantor uses this type of trust to provide for the needs of a disabled individual. The design of the trust is such that the funds in the trust do not interfere with the individual’s eligibility for government benefits.
Children’s Trust/ Minor’s Trust
This type of trust gives a minor access to their inheritance at an age specified in the trust. The grantor can also choose to have the assets become available at multiple times and various percentages.
Spendthrift Trust/ Beneficiary’s Trust/ Separate Share Trust
These types of trust allows the grantor to put a trustee in place to manage the funds in the trust in order to provide for the specific needs of the beneficiaries. A spendthrift clause in the trust protects the trust assets from creditors.
This type of trust acts as a pay on death designation on a bank account or other security. The assets in the trust pass to the beneficiary without having to go through the probate process.
This is just a small sample of the special trusts that are available to help you accomplish your estate planning goals. We will continue to overview common trusts for estate planning in part 3 of this article. In future articles we will be diving deeper into these individual trusts, discussing how they work, who they are for, and how you can fit them in your estate plan. Trusts are complicated and technical documents; they are not a do-it-yourself project. If you are interested in using trusts in your estate planning, speak to an estate planning attorney who can help you choose what trust is right for you, and then draft the required documents.