Nuts and Bolts of Trusts

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Nuts and Bolts of Trusts

• Simple Explanations for Complex Ideas
• Karen Brady [phone]
• www.coloradoestateplanning.com

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What is a Trust?

• Legal Explanation Trust is Contractual
  Relationship
• Simple Explanation Trust works like a basket

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Trust Basket

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Parties to a Trust

• 3 sides of a Triangle
• - Grantor (One who put asset in trust)
• a/k/a Trustor, Settlor, Trustmaker
• - Manager (One who manages trust)
• Official title is Trustee
• - Recipient (One who benefits from trust)
• Official title is Beneficiary

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Trust Triangle
Manager/Trustee
Grantor/Trustmaker
Recipient/Beneficiary
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Trustee

Beneficiary
Trustmaker
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Types of Trust When created

• Intervivos Trusts
• Estabished during
• grantors lifetime

• Testamentary Trust
• Established after grantors death pursuant to
  will
• ? Other Established after grantors death
  by means other than will, e.g. subtrust of a
  living trust

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Types of Trust - Revocability

• Revocable by grantor

• Irrevocable by grantor

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Surprise

• Trusts Pay Taxes (or at least somebody does)!

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Types of Trusts - Taxation

• Grantor Trusts income attributed to grantor

• Separate Entity Trusts trust pays income taxes
  as separate entity
• Simple Trusts mandates income to beneficiary
• Complex Trusts income discretionary, Schedule J
  of 1041, IRC Sec. 661

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Common Uses of Trusts

• Probate Avoidance thru Revocable Living Trust
• ?Probate is the court-approved transfer of
  assets of a dead person
• ?Probate originally developed for benefit of
  creditors
• ?Funded Living Trusts avoid probate because
  decedent owned no probate assets and basket
  didnt die
• Asset Targeting
• Ability to use one basket to funnel assets by
  using basket to hold property or receive as
  beneficiary

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Using Trusts to Minimize Estate Taxes

• Credit Shelter Trusts, a/k/a Bypass Trusts, a/k/a
  A-B Trust Planning
• Marital Deduction Trusts a/k/a QTIP Trusts
• BERT Trusts
• Inter vivos Irrevocable Trusts
• Grantor Retained Trusts
• GST Trusts (not addressed here)

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Credit Shelter Trusts

• Use of estate tax coupon
• Each of us has a credit, to be used like a
  coupon against our estate taxes
• Coupon is nontransferable and expires at death
• Use of marital deduction only delays taxation
  until second death, but wastes coupon
• Credit Shelter Trust is coupon trust to
  receive amount of credit

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Marital Deduction Trusts

• Trust which is established for surviving spouse
  (SS) and included in estate of SS at her
  death
• Often used to borrow coupon of SS, who may have
  smaller estate such as in second marriage
• Also used to create asset management and
  protection for SS
• Trust must mandate payment of income to SS

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Hmmm .

• What if we deliberately get outside of the
  marital deduction?

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BERT Trusts

• Buildup Equity Retirement Trusts
• One spouse makes annual gifts to irrevocable
  trust for other spouse
• Gifts must be limited to 5,000 or 5 of assets
  in trust
• No tax due on gifts to trust
• Trust assets are available to spouse (and
  co-trustee) for HEMS

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BERT Trusts

• As grantor trust, grantors SSN used during
  lifetime and income attributable to grantor
• Assets of trust are not in estate of grantor
  trust or beneficiary spouse
• At death of beneficiary, assets generally pass to
  children
• Can have a trust for each spouse (caution!)

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Inter Vivos Irrevocable Trusts

• Irrevocable Life Insurance Trusts (ILITs)

• Intentionally Delightful Trusts (IDITs)

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GRANTOR RETAINED TRUSTS

• Grantor Retained Annuity Trust
• - Split Interest trust with grantor retaining
  lead annuity interest and remainder passing to
  non-charitable beneficiaries, e.g. kids
• If annuity equals FMV of gift, no gift or estate
  tax paid

• Grantor Retained Unitrust
• split interest with grantor retaining lead
  unitrust interest (e.g. percentage based on
  amount of assets in trust each year)
• - Less useful than GRATs, can help with GST
  planning

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Grantor Retained Trusts

• Qualified Personal Residence Trusts
• - QPRTs
• Split interest with grantor retaining rights in
  residence during term of trust
• Grantor often rents residence from remaindermen
  after trust terminates

• Grantor Retained Income Trusts
• - For nonfamily members, which can include
  nieces/nephews and more remote relatives

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Income Tax Minimization

• Charitable Trusts

• Private Annuity Trusts

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Charitable Trusts

• Charitable Remainder Trusts
• Capital Gains Minimization
• Charitable Deduction
• Asset Diversification
• Income Maximizaton
• Estate Tax Planning

• Charitable Lead Trusts
• Useful Estate Tax Planning Tool in Uncertain
  Times
• Income Tax Advantages as Well

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Not Charitably Inclined? Lets See

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Private Annuity Trusts

• Works like charitable remainder trust but
  remainderman neednt be charity
• Minimizes risk of private annuity
• Spreads out capital gains
• Allows for asset diversification and income
  maximization
• Useful for estate planning

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Asset Protection

• Spendthrift Trusts

• Divorce Protection

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Disadvantages to Trusts

• Complexity (Real and Perceived)
• Inflexibility

• Income Tax Treatment

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One Solution

• Use of Trust Protector
• Disinterested Third Party able to make
  decisions about trust above and beyond authority
  of trustee, such as amendment of trust

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Nuts and Bolts of Trusts

• Simple Explanations for Complex Ideas
• Karen Brady [phone]
• www.coloradoestateplanning.com