Changes to POA Law: This memo discusses Governor Paterson’s changes to POA (Power of Attorney) law and how they affect you.

Dynasty Trust Article: A brief overview of Dynasty Trusts and how they can protect your heirs from estate taxes for generations.

Irrevocable Life Insurance Trust Brochure: Outlines the benefits of creating a life insurance trust

Sample Fiduciary Accounting Schedules: Examples of Accounting exhibits.

Understanding Your Fiduciary Responsibilities as the Executor– This memo defines what an executor is, and outlines the duties and responsibilities of an Executor.

Understanding Your Fiduciary Responsibilities as the Trustee– This memo defines what a trustee is, and outlines the duties and responsibilities of an Executor.

The Use and Advantage of Trusts

A trust is a legal relationship in which an owner (“Grantor”) transfers legal title of certain property to another party (a “Trustee) who, in turn, holds it for the benefit of the Grantor and/or another individual or individuals (“Beneficiary”). The terms and conditions under which the property is held by the Trustee are set forth in a written document. Revocable trusts reserve the right of the Grantor to control the assets and change the terms of the trust at any time. If a trust is irrevocable, you may give up rights to the trust property and cannot amend the terms of the trust.

Properly established trusts can be used to:

  • Manage and protect assets during your lifetime and afterward for your beneficiaries
  • Provide continuity in the management of your affairs after your death
  • Control how and when your assets are distributed
  • Avoid much of the costs and delays of probate
  • Ensure privacy and confidentiality in the handling of your affairs
  • Control income and principal distributions to children and grandchildren
  • Reduce estate and gift taxes

Commonly Used Trusts

In addition to revocable and irrevocable, trusts can be inter vivos (established during your lifetime) or testamentary (established under your will). Here are some popular basic trusts:

Revocable Living Trust

To control the management and distribution of assets in the event of incapacity or death and reduce estate expenses. You can:

  • Be your own trustee (but consider a professional successor trustee to serve upon your incapacity or death)
  • Maintain complete control as long as you are able
  • Amend or terminate the trust
  • Manage the investment of assets
  • Receive income and/or principal from the trust
  • Transfer property to your heirs
  • Avoid probate for the trust assets
  • Provide privacy for your family (in some states)
  • Reduce estate settlement expenses

Credit Shelter Trust

Typically funded at the death of the first spouse, this utilizes the federal Estate and Gift Tax Credit and provides estate and gift tax-sheltered assets for children and/or grandchildren. The Trust:

  • Assures that BOTH spouses use their Tax Credits, thereby exempting assets valued at $1,350,000 to $2,000,000, depending upon the year(s) of transfer(s), resulting in significant federal estate tax savings
  • Permits the surviving spouse to manage the investment of trust assets and receive income from the trust
  • Provides for trust property to be transferred to your heirs at the death of the surviving spouse or continue for a specific period of time
  • Avoids estate tax liability in the surviving spouse’s estate on the value of trust assets

Often used in concert with a Marital Trust (e.g., Qualified Terminal Interest Property Trust (QTIP Trust))—when assets over the Applicable Exclusion Amount used to fund the Credit Shelter Trust are placed in trust for the benefit of the surviving spouse. The surviving spouse may receive all the net income and also may have a right to the principal. (The TIPP Trust is used to assure that assets are directed to the beneficiaries chosen by the first spouse rather than to persons selected by the surviving spouse.)

Qualified Terminal Interest Property Trust (QTIP)

(see Credit Shelter Trust)

Irrevocable Life Insurance Trust

In most instances, removes life insurance proceeds from your estate and hence, avoids estate tax liability. You can:

Provide income and/or principal for your heirs

Prevent life insurance proceeds from being included in your taxable estate
Provide funds to pay estate taxes and other estate settlement expenses cost-effectively

Advanced Trust Strategies

A number of trusts can be used to accomplish more sophisticated financial and estate planning strategies. These trusts are usually irrevocable and can be used in concert with other trusts, such as those outlined previously. Some of the more prominent are:

Charitable Remainder Trust (CRT)

This type of trust is often used when one has highly appreciated assets. Assets may be donated to the trust and then sold without an immediate capital gains tax at the time of the sale. This allows for the full amount of sales proceeds to be reinvested. Typically, the donor and/or the donor’s spouse receives an income from the trust for his or her life or their lives, or for a period of years. Based on the type of CRT and funding vehicle the Trustee may control when that income is received. The donor also may receive an income-tax deduction (living trust only), and the asset, along with any appreciation, is distributed to a named charity at the end of the income period or at the death of the donor or donor’s spouse.

Charitable Lead Trust (CLT)

Assets are donated to a CLT, and a named charity receives income for a period of years. At the end, typically, the assets and all or a portion of the appreciation are transferred to beneficiaries. Any gift tax would be based on the value of the assets at the time of transfer to the trust, less a deduction for the value of the charity’s interest in the trust. Subsequent appreciation while the assets were in the trust would not be subject to any gift or estate tax.

Family Gift Trust

Used often in conjunction with the Charitable Remainder Trust, the Family Gift Trust provides a method for replacing assets lost to family members due to the donation to charity.

Grantor Retained Annuity Trust

A vehicle for passing appreciating assets to family members at discounted values. The grantor donates assets to the trust and receives a fixed annuity interest for a period of years. If the grantor survives the period in question, the assets are then distributed to beneficiaries free of any additional gift or estate tax. The taxable gift on the original transfer to the trust is substantially reduced by a discount on the initial value of the trust assets (based on the grantor’s annuity interest).

Qualified Personal Residence Trust (QPRT)

Also known as a “House GRIT” (Grantor Retained Income Trust), the QPRT is a trust into which you place your personal residence. While the residence is in the trust for a specified number of years, you retain the right to live there. At the end of the period of years, the home will be distributed out of the trust to the beneficiaries you have named, usually children or other family members. Because you have retained a right to live in the house during the term, there is a discount on the value of the home for gift tax purposes. Any and all appreciation occurring while the home is in the trust passes without incurring any additional gift or estate tax. (Note: You must live for the term of years to received this benefit.)

Dynasty Trust

Created to benefit multiple generations, the dynasty trust is funded with assets placed into the trust utilizing the generation-skipping transfer tax exemption ($1,030,000 per donor for gifts to skip persons in 2000, e.g., grandchildren, which may be increased each year due to inflation) and managed by a trustee for your family’s benefit. The terms of the trust—how trust income and principal will be distributed—can be flexible. For example, you can provide incentives for heirs to accomplish certain goals, such as graduating from college or obtaining employment, or you can instruct that beneficiaries can approach the trustee to fund special items such as a home. If the trust is properly established, the assets placed in the trust and all future appreciation on the assets pass to future generations free from federal and state transfer taxes as long as they remain in the trust. These trust are often funded with life insurance, which can generally be purchased for significantly less than the benefit it will deliver, to create substantial pools of assets for future beneficiaries.