By Marjorie Smith, CFP® and Charles J. Ingber, Esq.
A Trust to Meet Virtually Any Estate Planning Objective
Estate planning is arguably the most emotionally difficult aspect of financial planning. It forces people to contemplate their mortality and that of their loved ones. It is of vital importance, however, for those who want to name heirs and maximize what they will leave to them. Sound estate planning addresses a person’s personal, and sometimes private, wishes for how assets will be distributed upon death. It also seeks to minimize federal and state estate and gift taxes.
Trusts are an essential tool in estate planning. When we discuss estate planning goals with our clients, we often involve attorney Charles J. Ingber. “There is a trust to meet most any estate planning objective,” Mr. Ingber explains. “Most people do not realize the flexibility that trusts can achieve.” He provided an overview of the most common trusts while cautioning that estate planning can be complicated and many subcategories exist within these broad categories:
Revocable Living Trust. While this will not reduce income, gift, or estate taxes, a revocable living trust to hold all assets allows an estate to avoid the long, expensive, and public probate process.
Family Limited Liability Company (FLLC). FLLCs are used to pass valuable assets, such as investment accounts and business interests, to family members at a discount, enabling the donor to bequeath a greater value of assets within the limits of the available tax exclusions and credits. An FLLC allows the client to remain in complete control of the FLLC while living and to control who gets distributions, and in what amounts, while leaving a significant financial legacy to heirs.
Grantor Retained Trusts (GRT). A GRT allows the donor to transfer assets to a trust for a number of years. At the end of the term, the assets will pass to the named beneficiary or beneficiaries. The amount of the gift is the remainder interest. The GRT is a “grantor trust” for income tax purposes and all income tax is taxed to the donor.
Intentionally Defective Grantor Trusts. These trusts can be used to transfer a closely held business (i.e., a family business) to a younger generation without incurring any gift or income tax.
Generation-Skipping Transfers (GST). This type of transfer to grandchildren or younger generations can be made outright or via a trust. GSTs are subject to the generation-skipping transfer tax; however, the same gift/estate tax exemption applies to GSTs.
Dynasty Trusts. A Dynasty Trust is a trust that has a perpetual existence, except for in states where a “Rule Against Perpetuities” still exists. A donor can transfer funds to a Dynasty Trust and the trust will last indefinitely to benefit future generations. The initial transfer will be subject to gift tax, but if the donor has not exhausted the gift/estate tax exemption, then there will be no gift tax liability. The challenge with these trusts is defining the distribution standards to avoid creating a “trust fund kid.”
Charitable Giving. Charitable giving can take many forms, from outright gifts to charity, to using trusts, to creating private (or public) foundations. Most charitable gifts will generate an income tax charitable deduction.
“Once someone articulates estate planning goals, we can almost always draft a trust to accomplish them,” Mr. Ingber says. “When we have completed the planning, clients typically feel relieved to know their assets will largely avoid probate and their loved ones won’t have to worry about whatever issues have been resolved through the trust.”
While estate planning can force one to make difficult decisions and ponder unpleasant realities and potential outcomes, sound estate planning ultimately provides peace of mind. Contact us to discuss strategies for ensuring that your estate plan reflects your wishes.