Trust Me, You Need to Know About Trusts
Jennifer Junker, Chief Fiduciary Officer
Trusts are created for many different purposes, including probate avoidance, asset protection, maintenance of assets for special needs beneficiaries, safeguarding of assets for beneficiaries with addiction, or other issues as well as tax savings purposes. Some of the most common trusts you may see include Revocable Trusts, Special Needs Trusts, Marital Trusts, and Credit Shelter Trusts. As these trusts are sometimes called by different names, understanding the function of the trust will help you identify the types of trusts your clients may have and to make sound financial recommendations.
Revocable Trusts are created by a client (“grantor”) to hold assets during his or her lifetime. Assets can be payable to the trust or directly titled in the name of the trust, and the grantor often acts as the trustee of the trust while competent. Since the grantor retains the authority to revoke or amend the trust at any time, Revocable Trusts do not remove assets from the estate for estate tax purposes.
However, there are other benefits that have made Revocable Trusts popular, including the continuity of asset management in the event of incapacity or death. Successor trustees are named in the trust document and can step in to manage assets without the need for a court appointment. Revocable Trusts also offer probate avoidance, as assets owned by or payable directly to the trust upon the death of the grantor do not have to go through probate, which saves time and expense. Finally, a Revocable Trust also functions as a “will substitute” as the trust document can dictate what happens to assets held in or payable to the trust on death.
Special Needs Trusts:
As the name suggests, Special Needs Trusts are created for the specific purpose of holding assets for a beneficiary with special needs. These trusts can be created with proceeds from a court settlement due to an injury or other legal claim. They can also be created by a third party, such as a grandparent, with a gift in trust during the grandparent’s lifetime or at death.
Special Needs Trusts provide a way for a beneficiary to have access to funds which may otherwise jeopardize government benefits. Often the beneficiary will receive medical benefits which may be critical to the beneficiary’s health, and certain benefits may only be accessible through governmental programs. To qualify for these benefits, the beneficiary’s income and assets must be below certain specified amount.
Most trusts are considered countable assets for purposes of determining whether a beneficiary qualifies. Special Needs Trusts, however, when drafted and administered correctly, are not counted when determining a beneficiary’s eligibility. While there are limits on what distributions may be used for, funds in a Special Needs Trust can help enhance a beneficiary’s quality of life by providing for such things as travel, certain therapies, special education, and other items not covered by benefits.
Marital and Credit Shelter Trusts:
A common estate plan creates one or more trusts for the benefit of the surviving spouse upon the death of the first spouse to die. In past years, when estate tax exemptions were lower and estate tax rates were higher, this was often a necessity for tax planning purposes. Drafting attorneys frequently recommended the creation of a Marital Trust and a Credit Shelter Trust to fully utilize both spouses’ estate tax exemptions.
Upon the death of the first spouse, assets equal to the predeceasing spouse’s estate tax exemption would be held in the Credit Shelter Trust for the benefit of the surviving spouse. While the trust benefited the spouse during his or her lifetime, anything remaining in the trust at his or her death passed without estate tax to the named beneficiaries. Assets which exceeded the value of the predeceased spouse’s estate tax exemption would often fund a Marital Trust, also benefiting the surviving spouse and qualifying for the marital deduction.
At the surviving spouse’s death, however, assets held in a Marital Trust were pulled back into the surviving spouse’s estate for estate tax purposes. The surviving spouse’s estate tax exemption was then available to reduce tax passing by the terms of the Marital Trust or his or her own estate planning documents. This enabled both spouses’ estate tax exemptions to be used with the additional benefit of postponing any estate tax to be payable until the death of the surviving spouse.
Although Marital Trusts were not required for this planning to work as assets could be left outright to the surviving spouse, trusts provide many benefits including creditor protection for the surviving spouse. Similarly, since 2011 when portability was enacted, a Credit Shelter Trust is no longer necessary to ensure the use of both spouses’ estate tax exemption. However, there are many non-tax reasons to create a trust, and Marital Trusts and Credit Shelter Trusts are still frequently created in estate plans.
Families are unique and there is no one size fits all when it comes to estate planning. However, Revocable Trusts, Special Needs Trusts, Marital Trusts, and Credit Shelter Trusts are some of the most common types of trusts your clients may have. As an expert advisor, your understanding of the purpose of a trust created by a client or from which he or she benefits will help ensure the attainment of your clients’ financial goals. When you partner with a trust expert, you bring additional value to your relationships.
Arden Trust Company does not provide legal or tax advice. Please consult a legal or tax professional for advice specific to your circumstances.
1. A “Revocable Trust” may be referred to as a “Living Trust” or “Grantor Trust.”
2. A “QTIP” trust is a trust created with specific provisions necessary to qualify for the marital deduction and is one of the most common types of marital deduction trusts. Marital Trusts are also sometimes referred to as “A Trusts.”
3. While the current estate tax exemption is $12.02 million dollars per person, it was just $600,000 as recently as 1997 with estate tax rates reaching as high as 60%.
4. A Credit Shelter Trust may also be called a “Family Trust,” “B Trust,” or “Bypass Trust.
5. Assets passing directly to a spouse qualify for an unlimited marital deduction which means that no estate tax is due on the transfer. However, trusts created for the surviving spouse must meet certain requirements to qualify for the marital deduction.
6. The creation of a Credit Shelter Trust also provides the predeceasing spouse the ability to apply his or her generation-skipping transfer tax exemption to the trust, enabling the trust to pass for many generations without the imposition of transfer tax. This exemption is not “portable” to the surviving spouse, unlike the estate tax exemption.
7. There is an entire alphabet soup of acronyms for other types of trusts which you may see less frequently, such as CRUTS, CRATS, GRATS, GRUTS, QPRTS and more, but all will have the basic components explained in Understanding Your Clients’ Trusts.