There are many different kinds of trusts used to accomplish a wide variety of purposes in creating an estate plan. Some are created by the operation of a will, and they are known as testamentary trusts—meaning that they came to be via the last will and testament. That’s just the start of a thorough look at trusts for estate planning offered in the article “ON THE MONEY: A look at different types of trusts” from the Aiken Standard.
Another way to view trusts for estate planning is in two categories: revocable or irrevocable. As the names imply, the revocable trust can be changed, amended or revoked entirely, and the irrevocable trust usually cannot be changed.
A testamentary trust is a type of revocable trust, since it may be changed during the life of the testator. However, upon the death of the testator, it becomes irrevocable.
In most instances, a revocable trust is managed for the benefit of the grantor, although the grantor also retains important rights over the trust during her or his lifetime. The rights of the grantor include the ability to instruct the trustee to distribute any of the assets in the trust to someone, the right to make changes to the trust and the right to terminate the trust at any time.
If the grantor becomes incapacitated, however, and cannot manage her or his finances, then the provisions in the trust document usually give the trustee the power to make discretionary distributions of income and principal to the grantor and, depending upon how the trust is created, to the grantor’s family.
Note that distributions from a revocable trust to a beneficiary other than the grantor, may be subject to gift taxes. Those are paid by the grantor. In 2019, the annual gift tax exclusion is $15,000. Therefore, if the distribution is under that level, no gift taxes need to be filed or paid.
When the grantor dies, the trust property is distributed to beneficiaries, as directed by the trust agreement.
Irrevocable trusts are established by a grantor and cannot be amended without the approval of the trustee and the beneficiaries of the trust. The major reason for creating such a trust in the past was to create estate and income tax advantages. However, the increase in the federal estate tax exemption means that a single individual’s estate won’t have to pay taxes, if the value of their assets is less than $11.4 million ($22.8 million for a married couple).
Once an irrevocable trust is established and assets are placed in it, those assets are not part of the grantor’s taxable estate, and trust earnings are not reported as income to the grantor.
The downside of using irrevocable trusts for estate planning is that the transfer of assets into the trust may be subject to gift taxes, if the amount that is transferred is greater than $15,000 multiplied by the number of trust beneficiaries. However, depending upon the size of the grantor’s estate, larger amounts may be transferred into an irrevocable trust without any gift tax liability to the grantor, if the synchronization between gift taxes and estate taxes is properly done. This is a complex strategy that requires an experienced trust and estate attorney.
Trusts for estate planning are also used to address charitable giving and generating current income. These trusts are known as Charitable Remainder Trusts and are irrevocable in nature. In this type of trust there is a current beneficiary who is either the donor or another named individual and a remainder beneficiary, which is a qualified charitable organization. The trust document provides that the named beneficiary receives an income stream from the income produced by the trust assets during the grantor’s lifetime, and when the grantor dies, the remaining assets of the trust pass to the charity.
Speak with your estate planning attorney about how trusts might be a valuable part of your estate plan. If your estate plan has not been reviewed since the new tax law was passed, there may be certain opportunities that you are missing.
Reference: Aiken Standard (May 17, 2019) “ON THE MONEY: A look at different types of trusts”