Santa Cruz Estate Planning Attorney

Other Trusts

Living or Revocable trusts are the most commonly used trusts for estate planning, however there are numerous other types of trusts available. The trusts listed below each serve particular needs and can all be very helpful in estate planning.

Qualified Terminable Interest Property Trust (QTIP)

A QTIP is a trust primarily used by married couples. It can be used to meet one of two goals. The first is to reduce estate taxes. The second allows both spouses to choose the final distribution of their assets no matter who dies first.

When one spouse dies, generally their assets would be distributed according to the trust. A QTIP trust offers a second option. Instead of distributing those assets, they would go into a QTIP trust that would hold and manage the assets for the benefit of the surviving spouse during their life. When the second spouse dies the QTIP trust would distribute according to the instructions of the trust.

How Portability will work out in the long run will greatly impact the usefulness of a QTIP for the purpose of reducing estate taxes. The goal was to make sure both spouse's exemptions were used to minimize estate taxes. Now that may be moot if portability provides to b a long-term solution. However the second benefit to preserve distribution rights is becoming more valuable as many people enter second marriages and have children from previous relationships.

Qualified Domestic Trust (QDT)

A QDT is a trust used by married couples when one spouse is not a US citizen. It is used to replicate the Marital Deduction. The Marital Deduction allows for an unlimited estate tax exemption on transfers between spouses. However it only applies when both spouses are US citizens.

A QDT requires a number of formalities and can be complicated. They require additional estate planning to manage the estate tax issues, but this is a starting point when one spouse is not a US citizen.

Qualified Personal Residence Trust (QPRT)

A QPRT a trust used by the owner of a home who wants to make a gift of the home while minimizing the impact of the gift on their estate tax and lifetime gift exemption. To utilize this type of trust, the house would be put into an irrevocable trust that allows the owner to maintain use of the property for a fixed time before it is gifted according to the trust instructions.

The effect of this trust is that the value of the gift is it reduced. We can look at how the same gift of a $500,000 house would work with and without a QPRT.

Gift A: Owner gives the house to her child at death. The $500,000 value will come out of owner's estate tax and lifetime gift exemption.

Gift B: Owner gives the same house to her child in part of a QPRT trust. The terms of the trust retain a 10 year right to possession to the owner, then gives the house to her child. If the rental value of the house for 10 years is $150,000, then that amount is reduced from the $500,000 when calculating the value of the gift. Now there is a $350,000 gift instead of a $500,000 gift and a larger portion of the estate tax exemption remains for other gifts.

So by planning ahead, the same gifts can be given and their value reduced significantly. This may be useful for people who have numerous assets that they wish to give away before their death.

Bypass Trust

A Bypass Trust is a trust used by married couples to take advantage of both souses estate tax exemption. It operates similar to and often in combination with a QTIP trust. When one spouse dies their assets are put into an irrevocable trust. The trust will maintain and use the estate tax exemption of the first spouse to die and use it when the second spouse dies.

Like the QTIP trust we will see what effect portability will have. The primary purpose of the trust is to preserve the estate tax exemptions of both spouses. Portability allows for this without the use of a trust now, so if portability provides a long term solution then Bypass Trusts may become less used.

Disclaimer Trust

A Disclaimer Trust is a trust used by married couples to minimize estate tax exemptions. When one spouse dies, all property is gifted to the surviving spouse. The surviving spouse then can disclaim any portion of the gift based on estate tax needs. The amount disclaimed then goes into the disclaimer trust where it will be distributed according to the terms of the trust.

This offers a quite flexible tool. The surviving spouse can make sure the disclaimer trust gets to fully use the estate tax exemption of both spouses. It also allows the surviving spouse to decide how much of the gift they can take in light of their own estate tax exemption. Even with portability a disclaimer trust still offers flexibility that will be useful.

Life Insurance Trust

A Life Insurance Trust is a trust used by people who want to remove Life Insurance from their estate for estate tax purposes. Life insurance is included in the value of your estate and removing it can be a useful tool when making plans to avoid estate taxes. In addition some professions such as doctors use life insurance as a means of asset protection and use of a trust can be used in combination for an additional benefit.

It takes careful planning to make sure you can purchase the life insurance without using your 5 million dollar estate tax exemption. In addition there are some disadvantages such as the inability to change beneficiaries. The trust is a valuable tool, but takes a great deal of planning ahead to use it effectively and overcome the lack of flexibility.

Crummey Trust

A Crummey Trust is used by anybody who wants to take advantage of gifts during life to reduce the size of their estate. The 5 million dollar exemption each person has is for gifts at death and gifts during life. Each person may gift $13,000 to an individual annually. Any gifts beyond that come out of the 5 million dollar exemption.

The Crummey Trust takes advantage of the $13,000 gift by planning ahead. The person making the gift gives the $13,000 gift to the trust annually. Married couples get to each give the $13,000 gift so a married couple can give $26,000 to an individual annually. So by planning ahead a gift of over $250,000 can be given to each person tax free if you have 10 years to plan ahead.

Special Needs Trust

Special Needs Trusts are trusts used to give a gift to a family member who has special needs and gets public assistance. Often an inheritance will have a detrimental effect on benefits such as SSI or Medi-Cal. Instead of giving a gift as part of a will or living trust, the assets go into the special needs trust.

Funds from the trust cannot be given directly to the person. However money can be used to provide services to the person such as paying utilities; paying for transportation and provide housing. If the trust reduces payment for rent it will have an impact on the assistance, but it is a minimal impact compared to a direct gift.

Irrevocable Trust

An Irrevocable trust is a cross between a gift and traditional Living Trust. Since the property is in a trust it can be managed and distributed according to the trust instructions, but because it cannot be revoked the trust receives many of the same benefits of a gift. Common uses would be to put assets out of the reach of future creditors and to reduce the size of your estate before death.

An Irrevocable Trust can be a valuable tool and can be used in many situations. Many of the other trusts listed on this page involve the use of irrevocable trusts as a sub-trust. QTIP, QPRT and Special Needs Trusts are all good examples of a irrevocable trusts being utilized. They can also be used on their own to accomplish specific goals.

Portability

Portability is not a trust, but has much the same impact. Starting January 2011 Congress created portability. With portability a surviving spouse gets to keep any amount still remaining of the other spouse's estate tax exemption.

Example:

Fred and Thelma were married and have an 8 million dollar estate. Currently each spouse has a 5 million dollar exemption.

Fred dies and gives 1 million dollars to his son and the remaining 3 million of his estate to Thelma. The 1 millions comes out of his estate tax exemption and the 3 millions passes to Thelma using the marital exemption. That means Fred has 4 million dollars of exemptions left that will be passed to Thelma. Between her 5 million dollar exemption and Fred's 4 million dollar exemption she will not have to pay estate taxes on her 7 million dollar estate.