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Types of Trusts
1. Marital Deduction Trust
-Used by married couples to eliminate or significantly reduce the impact of federal estate taxes on the death of the last surviving spouse. At the 2015 federal estate tax rates, properly drafted Marital Deduction Trusts an shelter up to $10.86 million from estate tax if properly drafted and funded, for both spouses.
2. Elder Trust
-This type of trust may be used when the parties anticipate becoming vulnerable to outside influences of a third party to revoke the trust or change the terms of the trust to benefit persons other than those beneficiaries of the original trust. At the same time, the parties do not wish to lose their autonomy or control of their assets as long as they are in control of their mental abilities and faculties.
3. Perpetuity Trust
-A "perpetuity" trust, sometimes referred to as a "dynasty" trust, is a trust that in theory will last forever assuming the Grantor's descendants do not die out. This Trust, when correctly drafted and implemented, can assist in the avoidance of estate taxation upon future generations.
4. Cryogenic Trust
-A cryogenic trust is a form of "perpetuity" trust that in theory will last forever, or until the Grantor is revived after being placed in cryogenic suspension or biostasis. This trust should be used with a person intends to be cryogenically frozen until such future time when he or she may be revived and "cured" of whatever disease was responsible for death. The purpose of this type of trust is to provide for the Grantor's health, support and maintenance upon reawakening and also to support the nanotechnology research necessary to enable such revival (This firm has not actually had a client request this type of trust, but we have been educated in its implementation).
5. Credit Shelter Trust
-The most frequent use of this trust is for a single person, frequently widowed or divorced, who has children or grandchildren that may be too young to manage funds upon the death of their parent or grandparent.
6. Credit Shelter Trust with "Vacation" or Secondary Home Provisions
-This type of trust is designed to hold, manage, and control the family vacation home, whether a lake house in Austin, a ski lodge in Colorado, or a beach condo in California. The trust can be made in any state but usually is in the state of permanent residence of the Grantor. It is generally used when the Grantor has one or more children and grandchildren. The Grantor-owner is concerns with retaining the vacation home for successive generations and does not want controversy over the property's use, cost of maintenance, or sale.
7. Credit Shelter Trust with Firearm Provisions
-This type of credit shelter trust is specifically designed to be able to own and deal with firearms regulated by the National Firearms Act and various state statutes. As defined in the National Firearm Act (NFA), as recorded, it is unlawful to own or possess "Title II" firearms without registering them in the NFA registry. Title II weapons include but are not limited to: machine guns, short-barreled rifles (SBRs); short-barreled shotguns (SBSs); destructive devices (DDs) such as grenades, bombs, etc.; or "any other weapons" (AOWs) such as smooth-bone pistols, suppressors, pen and cane guns, or silencers. In order to purchase these restricted weapons, the prospective purchaser must fill out a Bureau of Alcohol, Tobacco, and Firearms (ATF) Regulation Form #4 to register the firearm. This type of trust is acknowledged by the ATF. If the trust owns the weapon, a signature of a local sheriff or city police chief is not necessary. The normal requirements of fingerprinting and photo-identification are also not necessary.
8. Two-Party Credit Shelter Trust
-The use of this trust is generally confined to situations where two persons, not married, intend to provide for each other during their joint lives, and after the death of one person, while still wishing to insure that assets descend to children, or other heirs upon the death of both parties.
9. Qualified Subchapter S Trust
-This trust is most often used when Subchapter S corporate stock is a part of trust assets.
10. Qualified Domestic Trust
-This trust is a "marital deduction" trust, but is necessary when the surviving spouse is not a United States citizen (because the unlimited marital deduction does not apply to non-U.S. citizens), whether the spouse is a resident or non-resident alien. This type of trust provides the non-citizen spouse with all income from trust assets at least annually and also permits certain distributions of principal in the case of "hardship".
1. "Crummey" Life Insurance Trust
-An irrevocable life insurance trust is a trust designed to remove life insurance death benefits from the estate of the deceased insured individual. Life insurance death benefits are includable in the federal tax estate of a decedent if there are "incidents of ownership" possessed by the decedent. By creating this type of trust which has the "incidents of ownership" normally owned by the grantor-decedent removed, the death benefits are not part of the taxable estate, resulting in reducing or eliminating estate taxes, shifting the tax burdens to a lower generation, and also creating greater liquidity in the estate in payment of taxes. The "Crummey" term originates from a case, Crummey v. Commissioner, in which the the U.S. Tax Court held that $14,000 gifts per person made to a irrevocable trust each year qualified as a "present interest" even though the recipient of the gift only had 30 days to request the monies otherwise, after 30 days, the recipient was only able to access the monies when the terms of the trust allowed. In addition, because $14,000 is less than the yearly gift tax exclusion, no gift tax had to be paid on the monies contributed to the trust. This trust is best used when a client has a taxable estate and is looking for a way to reduce his or her taxable estate, yet have some control over how and when the beneficiary receives the money.
2. Perpetuity "Crummey" Trust
-This trust is the same as the former, but designed to contain all of the elements of an irrevocable "dynasty" trust to save on estate and gift taxes upon the Grantor's descendants.
3. "Cross Crummey" Trust
-This form of trust reduces the risk that the Grantor outlives his or her spouse by creating trusts for each spouse insofar as either spouse will be able to receive the income from the other spouse's trust for their life.
4. Generation Skipping Trust
-In general, there are two benefits to establishing a GST and utilizing the generation-skipping tax exemption through this trust: (1) GST will be imposed when the transfer does not incur an estate or gift tax at each generational transfer, i.e. to granchildren or great-grandchildren, and (2) this trust can be used to protect assets from the creditors' claims, and in some cases, from claims of former spouses. This trust may also be used when children are already successful and do not need additional inheritance, but granchildren do.
5. Education Trust
-This type of trust is designed to combine all of the advantages and few of the disadvantages of other forms of trust providing for children and grandchildren of a grantor in their needs for college, university, or other post-high school educational needs. Frequently it is difficult to combine tax free gifts for such purposes without losing control of the assets, or insuring that the funds will be used for the intended purposes. This form of trust combines language necessary to qualify for the annual gift tax exclusion coupled with a "Crummey" power to create a present right to a future interest and at the same time gives the trustee broad power to restrict the use of the funds to their intended purpose.
6. Supplemental Needs Trust
-This type of trust is designed to supplement a handicapped or disabled parent or child, which will not jeopardize or reduce the beneficiary's eligibility for private, federal or state support, nor will the trust assets be subject to creditor claims.
7. Special Needs Trusts
-This type of trust is for the benefit of a disabled individual under the age of 65 who qualifies under 42 U.S.C.A. Section 1382c(a)(3) and which provides for repayment to the State for medical assistance provided upon the death of the disabled beneficiary. When a Probate Court, parent, grandparent, or guardian may desire to protect assets which ordinarily would pass to a disabled individual due to the death or a parent, or an insurance settlement, which is the result of an accident, and the parties wish to establish Medicaid or other state medical assistance.
8. Interest Only Trust
-An income-only trust is a trust for the life of the grantor who transfers ownership of assets to the trustee and the grantor retains the right to income, with restrictions, for life, a surviving spouse may be eligible for income, with the remainder to the grantor's children. This concept may create eligibility for Medicaid payments to the grantor if the trust has been established and funded for 60 months (5 years). This trust should be used if the grantor has sufficient other means of support, particularly for a period of at least five years. If so, this trust may create Medicaid eligibility for himself or herself, or spouse, preserving additional assets from being needed for nursing home care.
9. Charitable Remainder Trust
-This type of trust provides for lifetime distributions of income to the grantor and/or a second person, usually a spouse. At the death of the grantor and second person, if there is one, the remainder of the trust is distributed to a charity chosen by the grantor. This type of trust may also be for a term of years, not exceeding 20 years. Whenever a donor wishes to benefit a charity, but receive an income stream, the remainder trust will have tax advantages.
10. Charitable Remainder Unitrust (Real Estate)
-This type of trust works the same as the former, but with instead of the grantor receiving all of the income each year from the trust, the grantor receives an income, not less than five percent (5%) and no more than fifty percent (50%) of the assets invested and at the end of the term, or at the death of the life beneficiary, a stated charity receives the remainder interest. This type of trust lessens the chance that a grantor will be without adequate income when interests rate are low and/or investments are not receiving even modest returns.
11. Charitable Remainder Annuity Trust
-This type of trust is just like the former, but instead of a percent taken each year from the trust for the life of the grantor, a stated percent of the principal is taken for a term of years. At the death of the donor or at the end of the stated term, the named charity receives the remaining principal and accrued income. Similar to the Charitable Remainder Unitrust, the grantor normally donates property to the trust that has appreciated to a point when a sale would incur significant capital gains tax.
12. Charitable Lead Trust
-This type of trust is an income tax device that will enable a taxpayer to reduce the tax burden of an unusually high income year. If certain requirements are met, he or she will be allowed a current deduction for the value of an annuity or unitrust interest he or she gives to a charity in trust with the remainder going to a non-charitable beneficiary - like children.
13. Qualified Personal Residence Trust
-This type of trust is one in which the grantor places his or her primary residence (and possibly a second home) for a term of years into the trust. The grantor retains the use of the property for the term of years and at the end of the term, the remainder beneficiaries own the property at the appraised value of the property when it was placed in the trust. This type of trust is particularly useful when a client is single, such as a widow or widower, has a substantial estate with a large value in a home, or homes, and wishes to reduce or eliminate federal estate tax on the value of the home(s).
14. Grantor Retained Income Trust
-This type of trust is for a fixed period of years into which the grantor transfers ownership of assets and retains the income, or use of the property during the term of the trust. At the end of the trust term, the corpus, or principal of the trust, passes to non-charitable beneficiaries. This type of trust may be useful when a client has a taxable estate sufficiently substantial that a federal estate tax is certain to be imposed, there is a high probability of outliving the term that will be needed to obtain a low present value gift to the remainder beneficiaries.
15. Grantor Retained Annuity Trust
-This trust is just like the former, but the instead of the grantor having use of the trust assets for his or her life, the grantor has use for a term of years.
16. Grantor Retained Unitrust
-This trust is just like the former, but instead of the grantor having use of the trust assets for a term of years, the grantor has use of a fixed percentage of the trust assets each year for his or her life.
17. Incentive Trust
-This type of trust provides for lifetime support to the grantor of the trust assets and at the grantor's passing, principal and accumulated income are equalized among either children or grandchildren on an annual basis, measured by such beneficiaries' earned income, with charitable remainder if not all distributed to non-charitable beneficiaries. This trust is best used when the client intends to benefit his or her heirs but expects them to be proven self-sufficient prior to distribution.
18. Offshore Trust
-An "Offshore" trust is an irrevocable trust made with the trustee being a foreign national, generally a bank trust department, and usually, but not always, with a British law base. It is a "discretionary" trust in that the grantor has no absolute right to either income or principal. This type of trust is implemented when a grantor is interested in investing capital in an international trust as protection against deflating United States dollar, or the domestic tax structure. It is also used when a grantor wishes to invest in foreign investments which do not wish to comply with U.S. Securities and Exchange Registration requirements
19. Asset Protection Trust
-This type of trust is used when a grantor wishes to secure the largest possible protection against potential creditors, and a domestic family limited partnership is not a logical choice.
20. Delaware Asset Protection Trust
-This type of trust is just like the former, but settled or created in Delaware, a very pro trust jurisdiction. Best used as an asset protection trust when the client wishes to shield assets from potential creditors without going to the expense and time of using an "Offshore" Trust.
21. Short-Term Trust (Remainder to Grantor)
-This type of trust is an irrevocable trust for a period of years, wherein, the grantor wishes to place an asset, usually cash, securities, or other personal property, and not have access to the principal for the term, but which will return to him at the end of the trust term. Typically this occurs when a client has a child who just reached the age of majority (18) and who is not ready to assume financial responsibility yet. When faced with this situation, a parent will impress upon the child the need to protect and conserve the assets for a longer period of time. This type of trust affords "breathing room" while still giving the child access to interest income or principal, upon the advice and consent of a parent, for education or other needs.
22. Short-Term Trust (For Benefit of Parents; Remainder to Children)
-This type of trust may be used when a grantor has more than sufficient funds to live comfortably and is concerned for his or her parents who are retired and/or living on a fixed income and may be much older with or without problems often associated with aging. This trust may create a better lifestyle for parents without interrupting potential federal or state aid. At the passing of the last surviving parent, the remainder of the trust passes to the grantor's children or can return to the grantor.
23. Pet Trust
-A Pet Trust may be revocable or irrevocable and is designed to provide funds for the care and support of a grantor's pet animals after the death of the grantor and until the natural death of the animals.
Ultimately, the type of Trust drafted for our clients is more typically a combination of many of the Trusts described above.
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*The author cites Thomson Reuters, Trusts, by William W. Brown, 2013, as the primary source for the information above.
*This information above is not intended to be legal advice insofar as the information above is so incomplete as to be no more than educational in nature.