Does Your Client Need a Trust?

Special needs trusts are irrevocable trusts and thus are not subject to the claims of creditors or the winner of a lawsuit against the grantor or the beneficiary of the trust.

Marital Trusts

These are several types of marital trusts.

A marital A trust is established to benefit a surviving spouse. When the first spouse dies, the assets covered by the trust are transferred to a trust for the benefit of the surviving spouse. This allows any estate taxes to be deferred until the death of the surviving spouse.

During their lifetime, the surviving spouse must be the only beneficiary; upon their death the trust assets can pass to other named beneficiaries such as children, grandchildren and others.

A qualified terminable interest property trust, or QTIP, is used to provide income to the surviving spouse. Upon their death, the remaining assets go to beneficiaries that were named by the deceased spouse (the grantor). A QTIP is often used in second marriages and in other situations to maximize estate tax flexibility.

A marital B trust, or bypass trust, is often used in harmony with an A trust. These trusts are also referred to as family or credit shelter trusts. The B trust keeps these assets out of the surviving spouse’s estate altogether and can help the deceased spouse’s estate avoid estate taxes when the surviving spouse passes.

Depending upon your client’s level of assets and their desires for passing assets to a surviving spouse and/or the next generation, these or other variations of the marital trust can be useful.

Irrevocable Life Insurance Trust (ILIT)

An ILIT or irrevocable life insurance trust is designed to hold a life insurance policy for the purpose of excluding the death benefit from the grantor’s estate. There are rules surrounding how long the policy must be held inside of the trust to receive the estate exclusion. This can be a solid option for clients who want to leave a life insurance death benefit to their beneficiaries, but who need to have that death benefit excluded from their estate value.

The grantor can also set the trust up to allow the trustee to manage the policy proceeds for the trust beneficiaries or to allocate the death benefit among the beneficiaries based on their financial need or other factors.

Charitable Trusts

For clients who have charitable inclinations, there are two types of charitable trusts that can provide a benefit to a charitable beneficiary as well as to family members or other beneficiaries. Both of these trusts are irrevocable.

A charitable lead trust can be established by your client (the grantor) during their lifetime or as part of their will. The trust provides benefits to one or more designated charitable organizations for a set period of time, with the remainder of the trust’s assets distributed to family members or other beneficiaries at that time.

With a charitable remainder trust, your client can receive benefits for a period of time with the remainder going to one or more charities after a period of time or upon their death.

In both cases, the trust can be funded with appreciated securities, which allows your client to avoid any capital gains taxes that would apply if the securities were sold outright. There are tax deductions associated with the donations to these trusts, but the formula is a bit complicated, and your client should work with a tax professional who understands this.

GRATs

Grantor retained annuity trusts, or GRATs, allow the grantor to freeze the value of their estate while transferring any future appreciation to the beneficiaries. This can be a solid strategy for clients who want to avoid estate taxes and pass these assets to the next generation of children, grandchildren or others.

GRATs run for a fixed term and then the assets are transferred to the beneficiaries. GRATs also allow the grantor to take annuity income stream from the trust during the term of the trust.

Summary

In addition to the trusts discussed above, there are a host of other trust vehicles that can be valuable tools as part of your client’s estate planning strategy. The key is to work with them to determine their estate planning goals, the nature of the assets in their estate, their marital and tax situation, and of course, changes in the estate planning rules.

You will want to connect your client with a trusted estate planning professional, as well as an experienced tax professional to ensure they receive the full benefit of their expertise along with your guidance. You will also want to be cognizant of any legislative changes that might affect a trust strategy you and your client are considering.