Trusts are without doubt very effective Estate Planning Tools; whether Revocable or Irrevocable, they provide tax savings while preserving control over the assets in question. Consider the following review about many of the most commonly utilized trust formats:
CREDIT SHELTER TRUST
As a married person, the credit shelter trust (a/k/a Bypass Trust) is very frequently utilized to be sure to take full advantage of both your and your spouse’s Federal Estate Tax Exemption, currently $1,000,000 in the calendar year 2003. Simply put, upon the death of the first spouse, assets valued up to the exemption amount are funded into the credit shelter trust; the surviving spouse receives the income generated from the “trust principal” at least four times annually, and “principal” distributions are available subject to the trustee’s discretion. Upon the death of the surviving spouse, the balance of the “principal” passes to the “ultimate beneficiaries” (children) and because the last spouse to die did not “control” the trust, these assets “bypass” the second estate with no Estate Tax consequence. Of course, to be an effective Estate Tax tool each spouse must individually own assets to fund this trust at death
QUALIFIED PERSONAL RESIDENCE TRUST
The use of a Qualified Personal Residence Trust (QPRT) provides an individual with the ability to remove from the taxable estate frequently the largest single asset of the estate, i.e. your personal residence or vacation home. The QPRT provides an individual the ability to transfer to a trust such real estate for any period of duration you choose--- the government likes especially long trust durations because if your death occurs while the trust is in existence, the government disregards the trust entity and returns the asset to the estate to be taxed accordingly.
At the end of the trust duration, the trust entity terminates and the real estate is distributed to the beneficiaries of the trust. The QPRT is especially attractive when you believe we are in an appreciating real estate market.
QUALIFIED TERMINABLE INTEREST PROPERTY TRUST
The Qualified Terminable Property Trust (QTIP) provides a married couple the ability to create a trust for the surviving spouse that will generate income for life while preserving principal for the “ultimate beneficiaries”; this is a frequently used estate panning tool to “preserve” trust principal for children or children of a previous marriage. If desirable, the client can instruct the estate planner to draft the trust in a manor that will provide distribution of principal during the balance of the life of the surviving spouse.
QUALIFIED DOMESTIC TRUST
The Qualified Domestic Trust (QDOT) is utilized when the surviving spouse is NOT a United States citizen. Transfers to a non citizen spouse are carefully monitored by the Internal Revenue Service because of the concern that the noncitizen will receive the deceased spouse “inheritance” and flee the country thereby not providing the Internal Revenue Service the ability to impose its “transfer tax” on the available assets. The government addresses this concern by not permitting the estate passing to a noncitizen to qualify for the marital deduction unless the assets pass to the noncitizen via a QDOT. However, it must be remembered that in the event the spouse in a federal estate is not a United States citizen at the time of death of the first spouse, the survivor is permitted the opportunity to create this trust within nine months after the death of the first spouse.
GRANTOR RETAINED ANNUITY TRUST
GRANTOR RETAINED UNI-TRUST
The use of a Grantor Retained Annuity Trust (GRAT) or Grantor Retained Uni-Trust (GRUT) permit the grantor to establish a trust for a definitive period of time, and upon the termination of the trust period, the trust principal passes to the appropriate beneficiaries. In the utilization of a annuity trust the income received is an annuity based upon the value of the assets as determined when the trust is established; alternatively, in the utilization of s uni-trust the grantor receives a percentage of the value of the property yearly. It must be remembered that the present value of the income received reduces the principal that is dedicated to pass to the beneficiaries of the trust.
