Articles Posted in Trusts

For a Revocable Living Trust to function property, it is not enough for the Grantor (the individual who made the trust) to simply sign the trust agreement. He must fund his assets in the name of the trust.

Funding refers to taking assets that are titled in the individual Grantor’s name or in joint names with others and retitling them into the name of the Grantor’s Revocable Living Trust, or taking assets that require a beneficiary designation and renaming the Grantor’s Revocable Living Trust as the primary beneficiary of those assets.

The goal of funding a Revocable Living Trust is to insure that the Grantor’s property is governed by the terms of the trust agreement. This allows the Disability Trustee to manage accounts held in the name of the Grantor’s trust in the event the Grantor becomes mentally incapacitated and allows the Death Trustee to easily manage and then transfer accounts held in the name of the Grantor’s trust to the ultimate beneficiaries named in the trust agreement after the Grantor’s death.

The Trustee of a Revocable Living Trust has no power over the Grantor’s property that has not been retitled in the name of the Grantor’s trust. If the Grantor becomes mentally incapacitated, the Grantor’s loved ones will need to establish a court supervised guardianship to manage the Grantor’s assets that are not held in the name of the Grantor’s trust.

This means the Grantor’s property which has not been retitled into the name of the Grantor’s Revocable Living Trust will have to be probated after the Grantor’s death. This defeats one of the main benefits of a Revocable Living Trust which is avoiding probate.
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In his article titled Estate Planning for a Family with a Special Needs Child, Sebastian V. Grassi, Jr. lists five estate planning options for parents of a special needs child:

1. Distributing assets directly to the special needs child;

2. Disinheriting the special needs child;

What is a Trust?

Example: You are visiting your sister in Australia for six months and your son needs $5000 for living expenses while you are gone.

You could deposit $5000 in his checking account. But what if you are concerned that he might spend it on a wall size plasma television and have nothing left for food?

Instead of giving him the money outright, you could give it to your best friend with instructions regarding how the money is to be spent for your son’s benefit.

By giving the money to your best friend for your son’s benefit, you have established a Trust. You are the Grantor because you gave the money to your friend. Your friend is the Trustee because she is the one responsible for the management and distribution of the money according to your instructions. Your son is the Beneficiary because he will receive the benefit of the money you have put in the Trust. The list of instructions you gave your friend is the Trust Agreement. It tells your friend (Trustee) what to do. The $5000 is the Principal of the trust.

There are many types of trusts: revocable, irrevocable, living, testamentary and other distinctions. Illinois law sets forth requirements for all of them.
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In a recent article, Laura Saunders points out the advantages to a Grantor Retained Annuity Trust (GRAT).

GRATs transfer asset appreciation from one taxpayer to others, virtually tax free, and the benefit can be huge.

A taxpayer can set up a GRAT with a set term of two years or longer and transfer assets to the trust before the assets’ values surge (such as shares of stock). Over the life of the trust, the person who put the trust in place receives annual payments adding up to the asset’s original value plus a return based on a fixed interest rate determined by the Internal Revenue Service. That rate is currently 1.6%.

If that asset increases in value, the growth is outside of the grantor’s estate. When the GRAT’s term ends, the asset goes to the beneficiary. The result is no gift or estate tax on the appreciation. And if the asset decreases in value by the end of the term, it is simply returned to the taxpayer.
Beneficiaries can be unborn children as well as future spouses and current friends and relatives.
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As Kelly Greene points out in her recent article in the Wall Street Journal, families are looking to take advantage of the $5 million gift tax exemption which will expire at the end of the year, but at the same time they are worried that they will change their minds down the road or will need to get the money back from the irrevocable trust they are creating to take advantage of the gift tax exemption.

One way to make a trust more flexible is to designate a Trust Protector. This is an individual, often a relative, who oversees the Trustee of the Trust. The Trust Protector can remove a beneficiary, veto a distribution, move the trust to another state with more favorable tax laws or amend the Trust’s terms.

Ms. Greene goes on to point out the importance of designating the Trust as a Grantor Trust so the donor pays any income tax or capital-gains tax owed on the assets each year so those payments are not considered additional gifts. The payment of the tax is not considered a gift there is a legal obligation to pay it.
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Many people like the idea of leaving bequests to favorite charities in their wills. But instead of leaving money to a charity in your will, you can put that money into a charitable remainder trust and collect income while you are still alive. Charitable remainder trusts have many other advantages, including reducing your income and estate taxes and diversifying your assets.

A charitable remainder trust is an irrevocable trust that provides you (and possibly your spouse) with income for life. You place assets into the trust and during your lifetime you receive a set percentage from the trust. When you die, the remainder in the trust goes to the charity (or charities) of your choice.

A charitable remainder trust has many benefits. At the time you create the trust, you will receive an income tax deduction for charitable giving. Also, any profit from the sale of the investments within the trust are not subject to capital gains, which means the trustee may have more freedom in managing the assets. In addition, when you die, the assets in the trust will pass outside your estate and be eligible for the estate tax charitable deduction.

The downside of a charitable remainder trust is that it is irrevocable, meaning once you create the trust, you cannot cancel it. While you cannot revoke the trust, you may have the ability to change the beneficiary if you decide to give to a different charity. You may also serve as trustee, giving you control over how the trust assets are invested. In addition, note that any income you receive from the trust will be subject to income taxes.
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The White House recently proposed changes to the rules governing Grantor Retained Annuity Trusts. These trusts pay an annuity to the grantor over the life of the trust that equals the initial value of the assets plus an interest rate established by the IRS (currently 2.4 %). The annuity is not taxed since it flows back to the creator of the trust.

If the investment produces a greater return than the IRS established rate, there is a remainder in the trust which can be transferred to the beneficiaries of the trust without any gift tax being assessed.

But if the trust grantor dies during the term of the trust, the assets in the trust revert back to the grantor’s estate and are subject to estate taxes. To minimize the risk of the grantor passing away before the end of the trust term, Grantor Retained Annuity Trusts have been established which have short terms, some as short as two years.

Without the GRAT setup, any gifts by an individual in excess of $1 million over the individual’s lifetime would be subject to the current 45% tax.

The White House has proposed setting a minimum term of 10 years for GRATs. This minimum term might encourage individuals over 75 years of age to reconsider establishing a GRAT.
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A Grantor Retained Annuity Trust (GRAT) is comparable to an annuity. You place funds in the annuity and receive an annual payout based on the IRS stated interest rate at the time you establish the trust. This rate is currently 2.4%

When the annuity matures, any appreciation above the current rate goes tax free to your designated beneficiaries, who most likely will be your children.

Currently, interest rates and asset values are low so there is a very good chance that the assets in the trust will grow at a rate above 2.4%. Any growth above 2.4% passes tax free to the beneficiaries.
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A Bypass Trust, also known as a Credit Shelter Trust, lets a married couple double the estate tax exemption.

For example, if the husband dies first, his assets fund a trust for the children up to the estate tax exemption amount (currently $5 million Federal and $4 million for Illinois). All remaining assets go to the widow in a second, separate trust. The first trust (the children’s trust) is drafted to allow the widow access to the principal for medical costs and other needs. This safeguards against the funds in the widow’s second, separate trust from being completely depleted and the widow running out of money without access to the funds in the first trust.

The advantage is that when the widow dies, she can pass on $5 million in assets Federal tax free ($4 million Illinois tax free) to the children. Also, the Bypass trust allows for another $5 million Federal ($4 million Illinois) in assets to be passed on tax free to the children.

Another benefit to the first spouse to die is that this arrangement ensures that the assets will go to the children and not a second spouse of the widow.
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In a recent article in the Wall Street Journal titled, How to Fix Your Life in 2009, Eleanor Laise provides advice for individuals whose stock portfolios have been beaten down.

She suggests taking advantage of the $13,000 exemption from gift taxes that one can use to give up to $13,000 in stocks to as many recipients as one wants without incurring any gift tax liability. This has the advantage of reducing the size of one’s estate and, accordingly, one’s estate tax liability. It also allows the recipients of the gift to benefit from an increase in stock prices over the long term.

Another suggestion is to consider a Grantor Retained Annuity Trust or GRAT. Ms. Laise points out, “You can put your beaten-down stock in the GRAT, name your children as beneficiaries, and receive an annuity from the trust based on a percentage of what you contributed. As long as you survive the trust term, often just a couple of years, any stock appreciation beyond a ‘hurdle rate’ set by the government passes to the beneficiaries tax-free. That hurdle rate, currently 3.4 %, is at historically low levels, and it’s set to move even lower”.
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