There are several different kinds of trusts that a trust attorney may use to accomplish a wide variety of purposes in creating an estate plan. Some are created during a person’s lifetime, which are referred to as living trusts, and others are created by the operation of a will, and those are known as testamentary trusts. That’s just the start of a thorough look at trusts offered in the article “ON THE MONEY: A look at different types of trusts” from the Aiken Standard.
Another way to view trusts is in two categories: revocable or irrevocable. As the names imply, the revocable trust can be changed, and the irrevocable trust usually cannot be changed.
A living trust is a revocable trust, since it may be changed during the life of the grantor (the person who created the trust), usually with the help of a trust attorney to be sure the change is legally binding and sufficiently clear. However, upon the death of the grantor, the trust becomes irrevocable.
In most instances, a revocable living trust is managed for the benefit of the grantor, although the grantor also retains important rights over the trust during her or his lifetime. The rights of the grantor include the ability to instruct the trustee to distribute any of the assets in the trust to someone, the right to make changes to the trust and the right to terminate the trust at any time.
If the grantor becomes incapacitated, however, and cannot manage her or his finances, then the provisions in the trust document usually give the trustee the power to make distributions of income and principal to the grantor and, depending upon how the trust attorney drafted the trust document, to the grantor’s family and dependents.
Note that distributions from a living trust to a beneficiary other than the grantor or the grantor’s spouse may be subject to gift taxes. Those are paid by the grantor or applied against the grantor’s estate tax exemption amount at the time of death. In 2019, the annual gift tax exclusion is $15,000. Therefore, if the distribution is under that level, no gift taxes need to be filed for or paid. All of this is no different than if a person never had a trust, however. The gift tax laws are the same when no trust is involved.
When the grantor dies, the trust property is distributed to beneficiaries, as directed by the trust agreement, privately and free from probate court involvement. Although a trust lawyer is typically engaged to assist the trustee with transferring assets following a grantor’s death, it is much less expensive than when a probate is involved.
Irrevocable trusts are established by a grantor and cannot be amended except in special circumstances described here. The major reason trust attorneys used irrevocable trusts in the past was to create estate tax advantages. However, the increase in the current federal estate tax exemption means that an individual’s estate won’t have to pay any such taxes if the value of their assets is less than $11.4 million ($22.8 million for a married couple) in 2019, minus any gifts in excess of $15,000 made to a person in a calendar year for which no gift taxes were paid.
Once an irrevocable trust is established and assets are placed in it, those assets are not part of the grantor’s taxable estate (in most cases). Trust earnings are not reported as income to the grantor unless the trust attorney includes special language in the trust document to create that result (which might be the case if, for instance, the grantor wants to be responsible for the taxes so as to make additional tax free gifts to the beneficiaries by assuming those taxes).
The downside of an irrevocable trust is that the transfer of assets into the trust may be subject to gift taxes if the amount that is transferred is greater than $15,000 multiplied by the number of trust beneficiaries. However, larger amounts may be transferred into an irrevocable trust without any gift tax liability to the grantor, if the synchronization between gift taxes and estate taxes is properly done. This is a complex strategy that requires an experienced trust attorney.
Trusts are also used to address charitable giving and generating current income. These trusts are known as Charitable Remainder Trusts and are irrevocable in nature. There is a current beneficiary who is either the donor or another named individual and a remainder beneficiary, which is a qualified charitable organization. The trust document, which should be drafted by a qualified trust attorney, provides that the named beneficiary receives an income stream from the income produced by the trust assets, and when the grantor dies, the remaining assets of the trust pass to the charity.
Speak with a trust attorney about how trusts might be a valuable part of your estate plan. If your estate plan has not been reviewed since the new tax law was passed, there may be certain opportunities that you are missing.
Reference: Aiken Standard (May 17, 2019) “ON THE MONEY: A look at different types of trusts”