While this information sheet provides an overview of several types of trusts and the reasons why they may or may not be beneficial for you, you should meet with a financial advisor or investment professional to discuss your individual financial situation and to understand all of the consequences of establishing trust arrangements. Depending on your goals, the use of a trust can be an effective way to achieve your estate planning objectives.
An inter vivos, or living, trust
You may enjoy certain estate tax advantages because the assets held by the trust may be considered a gift and not subject to estate tax.
A testamentary trust
In an estate plan, a testamentary trust can serve a variety of purposes, such as
Once you have determined what your estate planning objectives are, you may want to consider establishing one or more of the following types of trusts.
A charitable remainder trust allows you to provide for your surviving spouse, donate assets to charity and avoid federal transfer taxes. The trust works like this: First, income from trust assets goes to your surviving spouse. Then, after your spouse’s death, trust assets are transferred to the charity, and no federal transfer taxes are incurred.
A QTIP trust is useful when the objective is to provide income to your surviving spouse while leaving the underlying property to a different beneficiary. Your surviving spouse’s income interest in a QTIP is not taxed upon your death because of your marital deduction, but he or she has no control over the ultimate disposition of the property, and upon your spouse’s death, the assets are includable in his or her estate. QTIP trusts are frequently used in second marriages when the donor wants to provide for the current spouse but ultimately wants the property to go to children from a prior relationship.
A primary estate tax planning objective is ensuring that the proceeds from a life insurance policy are not subject to federal estate taxes. This can be accomplished by arranging for an irrevocable trust to own the policy and serve as its beneficiary.
A GRAT is an estate and gift tax planning tool that allows you to give away an asset at a greatly reduced gift tax cost. To create a GRAT, you transfer the assets to an irrevocable trust and retain an annuity interest for a specified number of years. The retained annuity interest is designated as a percentage of the initial value of the trust assets (a GRAT). The remainder interest is designated as a gift to someone. The advantage of making a gift through a GRAT is that only the value of the remainder interest is taxable as a gift.
If the annuity paid to you is large enough, the value of your gift is zero (known as a zeroed-out GRAT). Any appreciation in the assets held by the GRAT over the IRS’ interest rate inure to the benefit of the remainder at no gift tax cost.
A QPRT is created when you transfer your personal residence to an irrevocable trust for the benefit of your beneficiaries while retaining your right to use the property for a certain amount of time. The benefits of a QPRT are that it enables you to incur gift taxes based only on the value of the remainder interest and to remove future appreciation on the property from your gross estate. You also will be able to live rent free in your home for the fixed term.
A Crummey trust (also known as a demand trust) is set up with the objective of using your annual gift tax exclusion of $16,000 per recipient ($32,000 for a married couple). In this arrangement, you deposit property up to the tax-free gift limit for each year ($16,000 for 2022, $32,000 for a married couple) into the trust. Each year, your beneficiary is given a window of time during which some or all of the property can be withdrawn.
The Totten trust is a type of revocable trust through which you deposit funds in a bank account for a beneficiary. Because the transfer into the account is revocable, only amounts that are actually distributed from the account to the beneficiary constitute a completed gift. A Totten trust does not provide any gift or estate tax benefits, but it is effective as a probate avoidance device.
To be effective, trusts generally need to be carefully created and may need to meet requirements not described here. Individuals should meet with a professional advisor to discuss their individual financial situation and needs, to ensure that the trusts are properly created and to clearly understand all of the consequences of establishing trust arrangements.
Which trust may be right for you depends on your specific objectives.Meet with your estate planning professionals to determine if a trust is the best option for you.
MFS Fund Distributors, Inc. is not affiliated with LPL Financial or StrateFi Wealth Management.MFS® does not provide legal, tax, or accounting advice. Any statement contained in this communication (including any attachments) concerning U.S. tax matters was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
©2021, StrateFi Wealth Management, All Rights Reserved.
Open:M-F 6:30am - 4:00pm PST
At StrateFi, we believe the advisor-client relationship only thrives when it’s a good fit for both sides.
18881 Von Karman Ave, Suite 410
Irvine, CA 92612
300 E. 2nd St, Suite 1510
Reno, NV 89501
BrokerCheck is a free tool to research the background and experience of financial brokers, advisers and firms.