Various Trusts Used in Estate Planning

Revocable Living Trusts: These Trusts are an excellent planning vehicle. They avoid probate, both lifetime (Guardianship) and after death (Estate) if properly funded. They can offer creditor protections for future beneficiaries, extended inheritance planning, and continuity of asset management. They are especially beneficial in situations where there are multiple properties located in different states or rental properties or businesses where continuity of management is important.

Irrevocable Trusts: Various forms of Irrevocable Trusts may be used in certain circumstances to accomplish specific planning goals. These often require the grantors to give up control of the assets, and often the ownership of the assets, but they can be very useful in the right situations. Following the Deficit Reduction Act of 2005 they may become much more popular as a means of Medicaid planning.

Marital and Family Trusts (A/B Trusts): These Trusts may be incorporated into a Will or into a Revocable Living Trust in second marriage and blended family situations to provide support for a spouse but to ensure inheritance by children. They may also be used for Estate Tax planning purposes to maximize Estate tax exemptions and minimize any Estate Tax. The current Federal Estate tax provides for “portability” of one spouse’s exemption to the survivor, without the need for the A/B trust we used to use to maximize each spouse’s exemption. With the current Federal Estate Tax exemption at $5.54 million per person and the Vermont exemption at $2.75 million, this planning is not a big consideration for many Vermonters.

SNT, Supplemental or Special Needs Trusts: These Trusts are variously called Supplemental Needs or Special Needs Trusts. Basically this type of trust is created for a person who has a disability and is, or may become, eligible for certain governmental benefits. The purpose of the trust is to allow the benefits to continue and to use the trust to provide things not covered by the benefits. There are several different variations depending on the purpose of trust, the beneficiary of the trust, the creator of the trust and where the trust assets came from.

Crummey Trusts: A Crummey Trust is a special trust established to take advantage of the annual gift exclusion in the Estate and Gift Tax laws. It is named after a Dr. Crummey who was the taxpayer who used it and took the IRS to court. It is not named that because it is a bad arrangement. Basically gifts are made to the trust, with notice given to the trust beneficiary that they can withdraw the gift within a certain period of time. If they do not withdraw, and they are not supposed to, then the trust controls the money until the donor’s death, but the trust is not a part of the donor’s estate. Often Crummey Trust provisions are used in ILITs so to acquire life insurance and pay annual premiums.

Irrevocable Life Insurance Trusts (ILITs): This type of trust is used to acquire life insurance and have it pass outside a taxable estate, thereby avoiding Estate Taxes. This can be a great benefit to provide cash to heirs and liquidity to an estate free from creditors’ claims. But it is most beneficial when there is a taxable estate situation.

Charitable Trusts: Charitable gifting can be a powerful tool in reducing estates and minimizing Estate taxes. There are a number of different types of Charitable Trusts that can be established, in addition to outright gifts. Charitable giving can be very valuable in dealing with highly appreciated property. Trusts may be structured to provide lifetime benefits for the donors while receiving the tax benefits at death. Warning: Charitable giving may be penalized by Medicaid, just as a gift to your family.

Intentionally Defective Grantor Trusts: These are a form of Irrevocable Trust. They are called ‘defective’ not because they are badly drafted, but because they transfer property for some purposes, but because of some retained rights, the property is included in the Grantor’s estate. This can be useful for obtaining tax basis adjustments and other purposes.

Michael D. Caccavo Esq.