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 Living
Trusts
A Living Trust is a trust
that an individual creates
during his or her lifetime
to accomplish specific
goals. These goals include
avoiding the probate
process, appointing Trustees
who can manage the
individual’s assets in the
event disability, speeding
the administration of the
estate at death, maintaining
privacy since the trust is
not filed with the
Surrogate’s Court at the
time of death and setting up
a structure to reduce the
likelihood of a will
contest. Generally, the
individual creating the
Living Trust acts as the
Trustee so as not to lose
any control over the assets although other
Trustees can be appointed if
necessary. A Living Trust
can be revoked or modified
at any time before death.
The major benefit of the
Living Trust is that the
assets in the trust at death
avoid the probate process.
To be effective, all
potential probate assets
must be transferred to the
Living Trust prior to death.
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Irrevocable Trusts
Creating Irrevocable
Trusts is an
important part of
the estate planning
process. There are
many different kinds
of trusts that solve
different problems.
Many can generate
significant estate
tax savings. Others
can generate income
tax savings. Which
type of Irrevocable
Trust is created is
a function of the
types of assets in
the estate and the
goals to be
accomplished.
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Intentionally
Defective Grantor
Trust (IDGTs)
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An Intentionally
Defective Grantor
Trust (IDGT) is one that
runs afoul of the
Grantor Trust Rules
under Sections 671
through 679 of the
Internal Revenue
Code. Any gifts to
an IDGT are
completed gifts for
gift tax purposes.
However, the gifts
are incomplete or
“defective” for
income tax purposes.
This means that the
grantor (creator of
the trust) would be
required to report
the income generated
by the trust assets
on his or her
personal income tax
return and pay the
income taxes on
behalf of the trust.
Thus, the assets in
the trust would grow
at an accelerated
rate without any
reduction for income
taxes. By creating
an IDGT, you can
substantially
leverage the amount
of assets that can
be passed out of the
estate without gift
tax costs.
As an example, if
you contributed
million to an IDGT that earned a
12% return, in 20
years, the assets
would grow to
approximately $9.6
million. The entire
value of the
appreciation would
be removed from the
grantor’s taxable
estate. This would
result in a
significant amount
of wealth you can
pass estate and gift
tax free to the next
generation. If the
trust paid its own
taxes, there would
only be $5 million
left in the trust
after the 20-year
term.
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 Irrevocable Life Insurance Trusts
(ILIT)
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For wealthy
individuals,
insurance can become
an important part of
the estate plan.
Insurance can be
used to help pay
estate taxes without
liquidating other
assets. Life
insurance is also
purchased to provide
for family members. Life
insurance benefits
are includable in a
taxable estate if
the insured is the
owner of the policy
or retains any
material control
over the policy. But
if the insured gives
up his or her right
to control the
policy, which is
instead owned by a
trust, the benefits
can flow to the
insured’s children
or other
beneficiaries,
without the
imposition of any
estate tax. This can
save hundreds of
thousands or
millions of dollars
in estate taxes.
This savings can be
accomplished by
creating an
Irrevocable Life
Insurance Trust.
There many types of
insurance strategies
that can be
implemented from the
very basic to the
very sophisticated.
Sophisticated
strategies may
include private
placement life
insurance where the
premiums paid are
invested in mutual
funds and hedge
funds. If the
investments are
successful, the
income generated
will grow tax free
within the shelter
of the insurance
policy. Premium
Finance insurance is
where an individual
borrows money to pay
for the premium. Under
certain
circumstances,
borrowing funds for
this purpose can
enhance the rate of
return.
There are also
strategies where
life insurance can
be purchased within
retirement plans and
paid for with
pre-tax funds.
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Grantor
Retained Annuity Trusts (GRATs)
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The turmoil in the
markets is not
necessarily all bad
news. Certain estate
planning vehicles
have become
particularly
attractive in
today's market
because they
outperform when
interest rates are
low and allow you to
remove undervalued
or appreciating
assets from your
estate. This could
occur once the
market reverses
recent trends. One
particularly
effective vehicle is
the grantor retained
annuity trust ("GRAT").
A GRAT is an
effective planning
strategy for
transferring your
assets to your
children at a
substantially
discounted gift tax
cost. With combined
federal and state
estate tax rates
approaching 55% in
some states, the
GRAT can be a very
important estate
planning tool. A
GRAT is an ideal
vehicle for
transferring
equities and other
assets out of your
estate that
currently have
appreciation
potential in excess
of approximately 4%
per annum. In a GRAT,
the grantor (creator
of the trust)
contributes assets
to the trust and
receives a fixed
annuity for a
specified term of
years. The assets
remaining in the
GRAT at the end of
the term will pass
estate and gift
tax-free to the
trust beneficiaries.
Enhanced planning
can result if
multiple GRATs are
created with
different types of
assets (for example,
a separate GRAT for
each of a long-term cap
fund, short term
value fund,
international fund,
hedge fund, etc.).
Also, the term of
the GRAT can be as
short as 2 years.
Because a GRAT is
treated as a grantor
trust for income tax
purposes, the
grantor will pay all
the tax on the
income generated by
the trust assets,
meaning that the
trust principal in
the trust will
continue to grow
outside of the
grantor's estate
without any
reduction for income
tax payments. Over
time, this will
result in very
significant estate
tax savings.
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Qualified Personal
Residence Trust (QPRTs)
A Qualified Personal
Residence Trust (“QPRT”)
places a residence
in a trust for the
benefit of one’s
spouse and children.
A QPRT is an
appealing estate
planning vehicle
because it combines
significant estate
and gift tax savings
with minimal
lifestyle changes.
A QPRT involves the
transfer of a
personal residence
to a trust by the
property owner (the
“grantor”). The
grantor retains the
use and occupancy of
the residence for a
designated term of
years. At the end of
the trust term,
ownership of the
residence passes to
designated
beneficiaries at a
substantially
reduced gift tax
value. During the
term of the trust,
the grantor is not
required to pay rent
but is responsible
for related
expenses. If the
grantor wishes to
extend his or her
stay beyond the
designated term the
grantor may have to
pay fair market
rent.
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Charitable Remainder Trusts (CRTs)
This trust allows
individuals to
benefit from the
trust by receiving
an annuity during
their lifetimes, and
to transfer trust
assets to a charity
after the death of
the surviving
spouse.
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