(as
published in the Western Business Journal)
These days it has become increasingly popular for individuals to use trusts when preparing their estate plans. A trust is a separate legal entity. It is created by a grantor under the laws of a state and valid trust agreement, for the benefit of a beneficiary or beneficiaries. The trust is managed by a trustee, who can either be the grantor or a third party. Trusts can be used to avoid probate, minimize taxes, provide for children or to support a charity. This article will briefly describe three commonly used trusts.
REVOCABLE LIVING TRUST
A revocable living trust is the most commonly used trust by individuals preparing their estate plans. A revocable living trust is created when a grantor transfers assets to a trust during her lifetime and signs a trust agreement. The trust agreement provides that the grantor retains the power to revoke, alter or amend the trust during her lifetime. Because the grantor can revoke or alter the trust, a revocable living trust provides a great deal of flexibility. As the grantor's situation changes, the trust can be altered to accommodate the change. Another advantage a revocable living trust offers is that when the grantor dies, all assets held by the trust pass outside probate and according to the terms of the trust. Avoiding probate may save time and money. Furthermore, when assets pass according to a valid trust, the trust agreement remains private. On the other hand, a will becomes a public document when submitted for probate. One potential drawback to using a revocable living trust is that any assets held by the trust will be included in the grantor's taxable estate at death. Therefore, a revocable living trust offers no tax savings when compared to a will.
QUALIFIED PERSONAL RESIDENCE TRUST
A qualified personal residence trust ("QPRT") is an irrevocable trust funded with the grantor's residence. The terms of a QPRT allow the grantor to remain in the residence for a predetermined period of time, after which the residence is transferred to the trust's beneficiaries.
A QPRT is often utilized by a grantor who would like to give her residence to her children, while minimizing potential tax liability. In the typical situation, a grantor creates a QPRT and names her children as the trust's beneficiaries, while retaining the right to occupy the house for 15 years. When the grantor transfers the residence to the QPRT, she makes a taxable gift to the trusts beneficiaries (ie. Her children). However, instead of paying gift tax on the full value of the residence, the value of the gift is reduced by the actuarial value of the grantor's retained use period. Accordingly, the grantor is able to transfer ownership of the residence while reducing the tax burden. Furthermore, as long as the grantor survives past the retained use period, the residence will not be included in her taxable estate at death and therefore not subject to estate tax.
One major drawback to using a QPRT is that if the grantor dies before the end of her retained use period, the residence will be included in her taxable estate and subject to the estate tax. Therefore, a grantor who dies before the end of the retained use period will pay both gift tax and estate tax on the same property.
CHARITABLE REMAINDER TRUST
A charitable remainder trust allows a grantor the opportunity to further a charitable intent while receiving a current income tax deduction. A charitable remainder trust is created when a grantor irrevocably transfers assets to a trust. The trustee then pays a percentage of the trust assets or a fixed amount of money to the grantor each year for either a predetermined period of time or for the grantor's lifetime. When the non-charitable period of time expires, the assets are then distributed to the charities named by the grantor in the trust agreement.
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