Trust Planning – a Primer
what is a trust? We use the term freely, and we see it everyday.
Everywhere. However, what is it and what does it do? A trust is
a device created by an individual, called a grantor, that allows
the grantor to transfer assets from himself to another
individual, called the trustee, to be maintained by the trustee
for the benefit of another, and that person is called the
Why have a trust? There are
many reasons, and the balance of this year’s newsletters will
focus on the most common reasons and the most common types of
trusts, as they apply to elder law. Most grantors create trusts
for the following reasons: tax and estate planning, Medicaid
planning, and charitable planning. We will discuss the basic
types and the most common varieties of those types, so that you
will have a better working knowledge of this extremely useful
legal technique, and thusly, can decide if a trust is a good
option for you and your family.
are two major types of trusts: revocable and irrevocable.
Revocable trusts, also commonly referred to as living trusts,
are frequently created as a substitute for a Last Will and
Testament. They are useful when an individual with assets has
been diagnosed with a memory-impairing illness. While the
grantor is still competent, she may create such a trust and fund
it with her assets. Thereafter, she can direct how those assets
are to be managed if and when she becomes incapacitated, and how
they must be distributed after she dies.
This type of trust allows an
individual to manage her assets before and after her incapacity
and replaces the need for probate of a Last Will and Testament,
if structured properly. In addition, it can be revoked or
modified or terminated entirely, at the whim of the grantor.
Accordingly, it is of no use to those interested in tax or
Medicaid planning, by virtue of the fact that it is, by
definition, revocable. They are not inexpensive, and a
well-drafted power of attorney may serve the exact same purpose
with a fraction of the up-front expense. Interestingly, living
trusts have caught on in California and are a much more
frequently utilized estate planning tool, there, than they are
here in New York.
The irrevocable type is a much
more favored-friend of the tax and Medicaid planning attorney.
The rationale being that once the assets are transferred into a
trust that the grantor may not amend, modify of terminate
entirely, then those assets no longer belong to the grantor. As
a result, that divestment allows the grantor to proceed as
though he no longer owns those particular assets, thus availing
him of a more favorable tax status or Medicaid eligibility
status. Examples of types of irrevocable trusts include
irrevocable life insurance trusts (ILIT), credit shelter trusts,
personal residence trusts, charitable split interest trusts and
the wildly popular special (or supplemental) needs trusts.
are aware that the federal estate tax structure is sitting in a
type of limbo. No one is certain of what will happen for sure,
but it is a reasonable assumption that the federal estate taxes
will not be phased out entirely, permanently. Currently, the
federal estate tax credit for an individual is $3.5 million and
the federal gift tax credit for an individual is $1 million.
That means that once an individual transfers assets in excess of
those credit amounts, taxes will be charged to that individual.
(New York has a $1 million estate tax credit, and New York’s
gift tax was phased out entirely several years ago, but we will
not focus on state estate taxes in these newsletters. For
information on local and state tax planning, please consult a
How does an ILIT work?
Basically, a grantor creates a trust and funds that trust with
cash which the trustee then uses to purchase premiums on life
insurance policies. In the alternative, or in addition, existing
policies may be transferred into the ILIT. Once the grantor dies
- so long as three years have passed since the purchase of the
insurance policy - then the policy proceeds pass to the
grantor’s children, estate tax free. There may be federal gift
tax ramifications, but creating the ILIT may still be worth
while. An ILIT is a most useful tool for those with sizeable
Our Summer Newsletter will
continue with the presentation and examination of other
irrevocable trusts, starting with Credit Shelter Trusts, so stay
The above list is for general
information purposes only. It is not intended to constitute
individual legal advice or a specific recommendation to any
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