Estate Planning for Financial PlannersIntroductionPartiesWhy Use a Trust? (1 of 3)Why Use a Trust? (2 of 3)Trust Duration – The Rule Against PerpetuitiesTaxation of Trust (1 of 2)Taxation of Trust (2 of 2)Classification of Trust ArrangementsSlide 10Specific Trusts Used in Estate Planning (1 of 8)Specific Trusts Used in Estate Planning (2 of 8)Specific Trusts Used in Estate Planning (3 of 8)Specific Trusts Used in Estate Planning (4 of 8)Special Trusts Used in Estate Planning (5 of 8)Slide 16Special Trusts Used in Estate Planning (6 of 8)Special Trusts Used in Estate Planning (7 of 8)Special Trusts Used in Estate Planning (8 of 8)© 2007 ME™ (Your Money Education Resource™)1Estate Planningfor Financial PlannersChapter 8:Trusts2© 2007 ME™ (Your Money Education Resource™)Updated on 12/12/062IntroductionUsed for:Management of assets.Flexibility in the operation of the estate plan (except charitable trusts).3© 2007 ME™ (Your Money Education Resource™)Updated on 12/12/063PartiesGrantor (a.k.a. settlor, creator, trustor)Person who creates and initially funds the trust.TrusteeManages the trust and carries out the provisions in the trust document.Must act in the best interest of the beneficiaries.•Duty of loyalty and care•Corporate trustee if you need a “bad cop” for problem childBeneficiaryIncome – right to income.Remainder – right to property when trust terminates.4© 2007 ME™ (Your Money Education Resource™)Updated on 12/12/064Why Use a Trust? (1 of 3)ManagementAssist those not capable of managing assets.Creditor protectionSpendthrift clause•States beneficiary cannot assign, pledge or promise to give the assets of the trust to anyone, and if a promise is made, it is void.Also should allow the trustee to make distributions on a discretionary basis.Most states do not allow the grantor to create a spendthrift trust for protecting his assets.5© 2007 ME™ (Your Money Education Resource™)Updated on 12/12/065Why Use a Trust? (2 of 3)Split interests in propertyValuable asset that grantor does not want to sell or split up (e.g., gifting farm to 5 kids where only 2 will participate).Avoid probate (living trust)Revocable living trust – managed by the grantor and is for the benefit of the grantor during lifetime.Becomes irrevocable at death.Does not avoid estate taxes.Avoid taxesTransfer future appreciation.Avoid transfer tax on subsequent generations.Reduce gross estate6© 2007 ME™ (Your Money Education Resource™)Updated on 12/12/066Trust Duration – The Rule Against PerpetuitiesAll interests in the trust must vest within lives in being plus 21 years.Some states have adopted statutory rule against perpetuities (90 years).IRS recognizes both rules.Some states have abolished the rule but include laws that prohibit the trust from not allowing the trustee to sell property.7© 2007 ME™ (Your Money Education Resource™)Updated on 12/12/067Taxation of Trust (1 of 2)Income tax – Hybrid entitiesDistributed – Taxed to beneficiaries.Accumulated – Taxed at trust rates.Simple trust – mandates distribution of income.Can not distribute corpusComplex trusts – permits accumulation of income.Capital gains part of income8© 2007 ME™ (Your Money Education Resource™)Updated on 12/12/068Taxation of Trust (2 of 2)Revocable – not a completed giftIrrevocable – generally completed (unless retained interests)9© 2007 ME™ (Your Money Education Resource™)Updated on 12/12/069Classification of Trust ArrangementsRevocable trustsAvoids probate.Provides for management of the grantor’s assets if grantor is incapacitated.Irrevocable trustsUsed to achieve estate and gift objectives.Inter vivos trustCreated during life.Testamentary trustsCreated at death.10© 2007 ME™ (Your Money Education Resource™)Updated on 12/12/0610Classification of Trust ArrangementsStandby trustUnfunded or minimally funded.Waiting for triggering event – usually incapacity.Pourover trustReceives assets from another source.Grantor trustInter vivos trust for the grantor.Grantor pays all income tax.Funded or Unfunded11© 2007 ME™ (Your Money Education Resource™)Updated on 12/12/0611Specific Trusts Used in Estate Planning (1 of 8)Inter Vivos RevocableImportant in states with high probate costs.Privacy is maintained.•No notice requirements.•Terms are confidential.Will contests are discouraged .•State law controls, but generally more difficult.NOT effective for reducing estate taxes.12© 2007 ME™ (Your Money Education Resource™)Updated on 12/12/0612Specific Trusts Used in Estate Planning (2 of 8)Inter Vivos IrrevocableCompleted gift!Use annual exclusion – remember need present interest.•Distributions of income are considered a present interest.•Crummey – letter sent to guardian•30 days to exercise right•Multiple beneficiaries, multiple exclusions13© 2007 ME™ (Your Money Education Resource™)Updated on 12/12/0613Specific Trusts Used in Estate Planning (3 of 8)Life Insurance (ILIT)Need present interest.Bypass (Credit Shelter or B) TrustSpouse can still get the income, HEMS, “5-and-5.”Usually Testamentary, but can be Inter Vivos and exclude future appreciation.Power of Appointment TrustGenerally used to take advantage of the unlimited marital deduction.May be used to avoid GSTT.14© 2007 ME™ (Your Money Education Resource™)Updated on 12/12/0614Specific Trusts Used in Estate Planning (4 of 8)Qualified terminable interest property (QTIP) trust (Also called the “C” or “Q” trust)Used to take advantage of the unlimited marital deduction.Grantor Retained Income/Interest Trusts (GRITs)Grantor retains an interest in the trust (usually an income interest).GRATS, GRUTS, QPRTS, TPPTs.15© 2007 ME™ (Your Money Education Resource™)Updated on 12/12/0615Special Trusts Used in Estate Planning (5 of 8)Grantor Retained Annuity Trusts (GRATs)Fixed percentage of the initial contribution for life or for a term of years.Based on Section 7520 rate2.2% as of January 2014Lower rate = lower payments to grantorExcess earnings above 7520 rate and appreciation during trust term are go to trust beneficiaries (usually kids or