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Summer 2010
Newsletter
In
the Spring Newsletter, we discussed the basics of trusts and
trust planning. We talked about revocable and irrevocable
trusts, and more specifically, living trusts and life insurance
trusts. The Summer Newsletter continues from there…
Credit Shelter (Bypass)
Trusts
 As
discussed in the Spring Newsletter, there are situations where a
beneficiary’s share of an estate would be reduced due to estate
taxes which become due on the grantor’s death. Is there a
situation where that never happens, where there are never any
estate taxes, regardless of the amount inherited? The answer is,
“yes,” but that case includes an extremely limited and finite
class of beneficiaries. The credit is unlimited when a husband
inherits from his wife or a wife inherits from her husband.
So, here’s a good question: If husbands and wives inherit tax
free from one another, what happens to the credit of the first
spouse to die? Technically, that first credit is lost, unless it
is preserved in a Credit Shelter or Bypass Trust. In a Credit
Shelter Trust, the credit of the first spouse to die is
preserved, in trust, for the benefit of the children, income to
the surviving spouse during the surviving spouse’s life. When
the second spouse dies, the children receive the benefit of both
credits, that of both deceased parents. Without this device, the
first credit would be lost completely.
Of course, 2010 is an odd year because there are no federal
estate taxes, at least not at this writing. We do not expect
this anomaly to last, and expect federal estate taxes to be
re-instated. Credit Shelter Trusts are normally included in the
Last Wills of a husband and wife, and are indispensible for
preserving the credit of the first spouse to die. Including such
an option in an estate plan is a must.
Personal Residence
Trusts
A
Personal Residence Trust is exactly what the title describes it
to be: a trust whose only asset is the personal residence of the
grantor. These trusts are particularly effective where a grantor
wishes to transfer a personal residence to her children over a
period of time-certain. Once the term has expired, ordinarily
ten or twenty years, then the property passes to the
beneficiary-children. The caveat here is that the real property
in question must qualify as the principal residence of the
grantor, be it a house or cooperative apartment.
While it is not impossible to transfer mortgaged property to a
Personal Residence Trust, notification to a lender of the
intention to do so may cause significant additional costs.
Naturally that is not an issue if the personal residence is
owned by the grantor outright. The attractive aspect of this
trust is that it allows the transfer of interests in real
property during the term-certain at discounted valuations;
however, if the grantor dies during the term-certain, there is
no tax benefit because the personal residence is brought back
into the estate of the grantor for estate tax purposes.
Charitable Split Interest
Trusts
For
those interested in philanthropy, Charitable Split Interest
Trusts are an excellent option because, depending on the type,
one can save on income and estate or gift taxes and help a good
cause or good causes, all at the same time. This is a vast area,
and much of the complexities are outside the scope of this
article, but, by way of an introduction, we will present the
most common types, and, in general, what they do and how they
work.
Apart from charitable foundations, charitable trusts come in one
of two types: the Charitable Remainder Trust or Charitable Lead
Trust. The idea of helping others while helping oneself appeals
to many. Gifting to charity by way of one of these trusts
results in income tax deductions, estate or gift tax deductions,
and either income stream for life to a grantor or grantors, or
remainder gifts to children.
While the method of contribution to the trust varies, the basic
difference between the two trusts is that, in the remainder
trust, the non-charitable beneficiary receives lifetime income,
and on that beneficiary’s death, the remainder in the trust
passes to the charity previously designated. A lead trust works
in the opposite way: income to the charitable beneficiary for
life, but on the death of the grantor, the remainder passes to
the non-charitable beneficiary, such as the grantor’s children.
While the foregoing is a vast simplification, if one has a
favorite charity, such as New York University or New York City
Ballet, one can derive enormous social and economic benefits
from considering this type of trust planning.
We will conclude our three-part series in the fall. Have a
wonderful, healthy summer…………………
The above list is for general
information purposes only. It is not intended to constitute
individual legal advice or a specific recommendation to any
particular client.
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