The Use of Trusts in Estate Planning

By Engel, Ralph M. | The CPA Journal, February 1998 | Go to article overview

The Use of Trusts in Estate Planning


Engel, Ralph M., The CPA Journal


Except with respect to "I love you" all-to-spouse or all-to-children wills, almost all modem estate plans incorporate one or more trusts.

Some types of trusts are utilized in an attempt to postpone or even eliminate estate taxes. Others may be used to deal with particular problems, such as an incapacitated beneficiary or a second (or third) marriage. Still others are created to deal with multigenerational planning, or to protect a beneficiary aeainst creditors. future spouses, or even the beneficiary's existing spouse.

In certain instances, trusts are utilized to avoid state income taxes, such as those with appropriate trustees and asset locations that are run from states that have no income or capital gains taxes on trusts for the benefit of nonresidents. In others, trusts are used to obtain estate and/or gift tax discounts, avoid or postpone capital gains taxes, deal with assets passing to spouses who are not U.S. citizens, aid charities, etc.

There are also a few entities called trusts that do not fit into the typical trust image, such as mortgage arrangements that, in some states, are denominated as trusts, and certain business ventures called trusts.

Over the years some trusts have acquired multiple names. In fact, we ascertained that the 50 or so trusts (or arrangeIn Brief GRIT? GRAT? Look It Up. An overview of the types of trusts typ ically utilized by individuals with moderate to substantial wealth. ments denominated as trusts) that are discussed here are known by an aggregate of 75 different names.

This discussion is not meant to be detailed coverage of every type of trust in existence. Its purpose is to provide an overview of the types of trusts typically utilized by taxpayers of moderate to substantial wealth.

The following is a listing of the types of trusts that will often be encountered in connection with estate planning. A-B Trusts. Before the adoption of the unlimited marital deduction and while the marital deduction was limited to 50% of an individual's adjusted gross estate, it was common to create two trusts for the benefit of an individual's spouse, one which qualified for the marital deduction and one which did not. These were frequently referred to as AB Trusts.

Alaska Trusts. These trusts, available in certain states, combine the benefits of multigenerational planning (see Generation Skipping Trusts and Dynasty Trusts, below) with an attempt at protection from the grantor's creditors. They have risks which must be carefully considered.

Applicable Credit Amount Trust See Unified Credit Trust (below). Blind Trust This is a trust, often created by a politician after election to office, pursuant to which certain assets of the grantor are managed by one or more trustees without the grantor being advised of (or having any continued input as to) what is taking place. The assets, however, are managed for the benefit of the grantor of the trust.

Bypass Trust See Credit Shelter Trust (below).

Cemetery Trust This is typically a trust for the purpose of maintaining one or more graves or grave sites in a cemetery. Charitable Lead Trust. This is a trust pursuant to which a specified sum (expressed as a fixed percentage of the value of the trust at inception [in effect, an annuity] or as a fixed percentage of the value of the net assets of the trust, calculated annually), is to be paid to a charity at least annually, for a specified period, with the remainder then passing to one or more individuals. If an annuity is utilized, it is a Charitable Lead Annuity Trust (a CLAT); if a percentage of the net assets valued annually is utilized, the trust is a Charitable Lead Unitrust (a CLUT). Such trusts may save estate, gift, and income taxes.

Charitable Remainder Trust This is a trust pursuant to which one or more individuals receive, at least annually, either a sum equal to a fixed percentage of the assets valued at the trust's inception (in effect, an annuity) or a sum equal to a fixed percentage of the net assets of the trust valued annually, either for a set number of years or for one or more lifetimes. …

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