What Everyone Building or Protecting Wealth Should Know About Estate Planning Trusts
- Mr. Organic
- Jun 14, 2019
- 4 min read
Updated: Jul 3, 2019
Protect Your Legacy
I often ask my clients, “because you’ve worked so hard to build your wealth, do you believe it is important for it to be taken care of?” Yes is almost always the answer to this question, but are you doing everything necessary to fully protect your wealth? Even if you have not already amassed your wealth here are some important estate planning trusts you should be aware of.
Create a Will
But before we get there, just to hammer home my point. Here is a Forbes article of 17 famous people who died intestate (or without a will). This means the estate of these very wealthy individuals did not get to follow their wishes for wealth transfer, but rather was forced to follow the rules of the state/states in which they claim residency through a process called probate. Here is a reference link to State-by-State Probate Laws if you are interest in knowing more about the process of your state.
For more information on wills please see: What Does a Will Do and Do I Need a Will?
Brief Overview of Important Trusts:
Dynasty Trust - Avoids GSST (Generation-Skipping Transfer Tax), transfer substantial wealth
Bypass Trust -The applicable exclusion amount is funded into the bypass trust, and the rest is left to the spouse. Spouse can access for health, education, maintenance, and support (HEMS). When surviving spouse dies it is not included in her gross estate, and property passes to the remainder beneficiaries. Often used for non spouse heirs who are not sophisticated or mature enough to handle property. Sometimes called a B Trust. Paired with survivors trust often referred to as the A Trust.
Qualified Terminable Interest Property (QTIP) Trust - Used when over estate tax exemption, sometimes called C or Q Trust.
Powers of Appointment Trust - Allows a terminable interest to be passed to a surviving spouse and the property to still qualify for marital deduction. Requires income to be paid annually to surviving spouse, but the spouse does have general POA and the value is included in the surviving spouse's estate upon their death.
Crummey Powers - Placing a Crummey power in an irrevocable trust allows a future interest to be converted into present interest, which qualifies for the annual gift exclusion. Must follow the 5/5 rule if there are multiple beneficiaries on the trust, or set up separate trusts.
Inter Vivos (Living Trust) - Created during grantor's life, property transfers to trust before the grantor's death.
Testamentary Trust - A trust that becomes effect at death (see link for Inter Vivos)
Pourover Trust - Assets are poured over from another source (IRA, will, or insurance). Can be revocable or irrevocable
Health and Education Exclusion Trust (HEET) - Trust created to pay education and medical expenses of grandchildren or other 'skip beneficiaries' free of gift tax and GSST.
Totten Trust - Also known and "POD" (payable on death) created by New York statute, used to avoid probate for savings/checking and securities.
Qualified Personal Residence Trusts (QPRTs) - And Personal Residence Trusts (PRTs) - Grantor transfers personal residence to a trust and retains the right to live in the residence during the trust term. Only one residence in each trust. This is most effective when the property is expected to appreciate rapidly. May be appropriate estate planning technique for a vacation home. A QPRT may be able to sell the residence and reinvest into another residence, a PRT cannot do this. Normally a period of time (5,10,15,20 years) attached to the QPRT that the donor is expected to outlive or the residence will still be included in the gross estate.
Grantor Retained Annuity Trusts (GRATs) - Grantor places money into trust, receives an annual payment from the trust (2-5 years usually) of either a fixed amount or a fixed percentage of the initial FMV (Fair Market Value) of the trust assets. Trust is not included in the grantor's gross estate if grantor lives beyond terms of trust. Usually used with a family member and where the transferor has a better-than-average probability to outlive the term of the trust.
Charitable Remainder UniTrusts (CRUTs) - an irrevocable trust that provides income for the grantor and the principal balance goes to a charity upon death or termination of the term period. No additional contributions can be made.
Charitable Remainder Annuity Trusts (CRATs) -additional contributions are permitted. Same set up as a CRUT. See CRUT link
Charitable Lead Trusts - Typically used by high-wealth individuals who have no need for the current income from the assets. Income from property is transferred to a trust and given to a charity. The remainder reverts to the non charitable beneficiary (often family).
Avoiding probate is the goal
If you really want to be sure your dependents receive your wealth rather than it being subject to the IRS it is important to always be updating your plan as the rules change! Do not make the same mistake that Bob Marley, Prince, and Michael Jackson all did.
Always be updating your estate plan (at least annually)
Protect and fund your estate properly so your hard earned wealth ends up where you want it, and does not become the decision of the state in which you claim residency! With so many changes happening with exclusion amounts, tax brackets, and other areas of concern, now is a better time than ever to review your estate plan!
Thank you for your time
IMPORTANT: Please keep in mind this is a high level list of trusts, and you should meet with your team of financial planners, estate planners, and CPAs before making any decisions or drafting documents.
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