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TrustsTrusts...It's not just for the super wealthy anymore. A trust is one of the best tools that you can use to maximize your estate tax exemption. The trust document will spell out who the trustee(s) are who in turn have a fiduciary responsibility to the beneficiary(ies). While there are many types of Trusts, we will focus our attention on the six most popular types used as Estate Planning techniques.
Credit Shelter TrustA Credit Shelter Trust a.k.a. a Bypass or a Family or an AB Trust has the ability to effectively double the amount of money that you can leave tax free to your heirs. Here is how that would work. You would place an amount of money up to but not exceeding the estate tax exemption of $3,500,000.00 (2009 limit) inside of the Trust. The remainder of your estate would then pass to your spouse who also is entitled to an estate tax exemption of $3,500,000.00. Using this technique can effectively bequeath up to $7,000,000.00 tax free to your heirs. You can also attach strings as to how the money is to be distributed after you die. So now you might be thinking, why not just pass $3,500,000.00 directly to your kids, the ramainder would go to your spouse and you could dispense with the Trust altogether. The main reason you would not do this is because you want your spouse to have access to the income generated from the trust while they are alive especially if there is a possibility of your kids burning through their inheritance.Irrevocable Life Insurance TrustAn Irrevocable Life Insurance Trust or ILIT for short has the ability of removing your life insurance policy from your taxable estate. This can be especially useful if your total estate is over the $3,500,000.00 threshold (2009 limit). By giving up ownership to the ILIT, you might now bring the total estate value down below the limit and avoid having to pay any estate tax. Your heirs can use the proceeds from the policy any way they wish including taking care of any estate costs that may remain after your gone. Alternatively, you could attach strings to the disbursement aspect of the policy. You should note that in order to reap this tax benefit of reducing your estate value, the insured must not die within three years of the date the insurance policy was transferred into the ILIT.Generation Skipping TrustA Generation Skipping Trust allows you to transfer up to $3,500,000.00 (2009 limit) to your grandchildren tax free. This has the effect of avoiding estate taxes twice. Once when you die and once when your children die. You might think that skipping over your children is not fair to them but this technique is usually employed when your children are financially secure already. Furthermore you would consider it in a case where your child is irresponsible and would possibly burn through the inheritance which would deprive your grandchildren of any benefit. Your children would have access to any income generated from the assets inside the Trust but they would not have any ownership rights as these would be secured and protected for the grandchildren.Qualified Personal Residence TrustA Qualified Personal Residence Trust, (QPRT), has the ability to remove your home from your estate. This is a good tactic for lowering the value of your taxable estate and possibly dropping below the $3,500,000.00 threshold for paying taxes. The catch is that you must outlive the term of the trust, typically 10, 15 or 20 years, which has to be stipulated. This has the effect of freezing the value of the house as of today's worth for gift tax purposes while in realty, 20 years from now, the house should be worth much more. If you die before the term is up, the house reverts back into your taxable state. If you outlive the term, you have accomplished your goal and must either move out or pay rental to the beneficiaries of the trust which generally are your children. This is an irrevocable instrument which can have very positive uses for lowering estate taxes and gift taxes.Qualified Terminal Interest Property TrustA Qulaified Terminal Interest Property Trust, (QTIP Trust), Can be used when you want to channel some or most of your assets to certain relatives. This usually happens in cases of divorce and remarriage. Say you remarry but you want the bulk of your estate to go your children from your first marriage. You would place these assets in a QTIP Trust. Now upon your demise, your second spouse has access to any income that the Trust might generate which helps them but never gains ownership rights to the contents of the Trust. Ownership stays with the beneficiaries which presumably are your children. As such, this is similar to a generation skipping trust.Charitable Remainder TrustA Charitable Remainder Trust, (CRT), is an excellent planning tool for many people. If you have a portfolio that includes highly appreciated securities, a CRT may be just right for you. By donating some or all of these assets, you can lower your taxable estate, provide an income to yourself and or your spouse, and avoid the capital gains tax on the eventual selling of these assets. Since the law encourages charitable giving, supporting a noble cause can be a great tax saving event while donating to charity. Even though this giving is irrevocable, it is possible to become a trustee of the CRT which in turn will allow you to make decisions involving the assets.
Some of you may like to do further reading on Estate Planning or Trusts. May I refer you to the following publications:
Go To Estate Planning From Trusts
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