Trusts Attorneys in New York City and Suffolk County

A trust can be revocable or irrevocable. A revocable trust is used solely to bypass surrogate’s court at the grantor’s death and can be revoked by the grantor at any time. An irrevocable trust generally cannot be revoked by the grantor, except under certain circumstances. This is because Irrevocable trusts remove at least some of the grantor’s control to either move assets out of the estate for asset protection or to avoid estate tax.

How Can a Legal Firm Help Protect My Assets?

Trusts are a common estate planning tool to reduce estate tax liability and protect assets. Creating a trust can help keep wealth within the family for generations – instead of losing a percentage of inherited assets to the IRS, creditors, bankruptcy, litigation and divorcing spouses.

Inheritor’s Trust

An inheritors trust is created for the benefit of a beneficiary and can exist during the grantor’s life or as a testamentary trust. The purpose is to protect the assets from creditors and divorce. The beneficiary can be their own trustee and, as trustee, he or she can distribute to oneself for health, education, maintenance or support. This “HEMS” language comes straight from the IRS and is very broad. Nonetheless, if the beneficiary wants a distribution for any other reason, they must appoint an independent trustee, who is not related by blood or marriage, to make this distribution. Most of these trusts are structured so that the beneficiary receives all income generated from the trust. In this way, any income is taxed at the beneficiary’s individual tax rate rather than at the much higher trust tax rate.

Inheritors trusts can be further modified to not only protect the beneficiaries from outsiders but from themselves. A third party can be appointed to act as trustee to manage and distribute the trust assets to the beneficiary. This is often done when a beneficiary is a minor, has bad spending habits, or when the trust assets are considerable.

Medicaid Asset Protection Trust

A Medicaid Qualifying Trust is an irrevocable trust that protects assets from the exorbitant cost of long-term care. This type of trust is structured so that the grantor and spouse can have income generated from the trust, but have no access to the principal in the trust. The grantor can retain the right to live in any house included in the trust, to replace the trustee at any time with anyone other than the grantor or spouse, and change the ultimate beneficiaries. Any assets placed in such a trust is not a countable resource for Medicaid long term care purposes.

Irrevocable Life Insurance

An Irrevocable Life Insurance Trust (ILIT)is a trust created by a single individual or jointly between spouses to hold a life insurance policy. The purpose of an ILIT is to move money out of the grantor’s estate and provide liquidity at death. In large estates, the cash proceeds may be earmarked to pay the state level estate taxes. In smaller estates, the insurance policy proceeds can be used to provide for family members and satisfy outstanding debts.

The initial gift of the insurance policy to the trust is counted toward the insured’s lifetime gift tax exemption. Ideally, the insured leverages their $15,000 annual gift tax exclusion, per beneficiary, to fund the annual premiums. In this way, only the initial gift is counted toward the grantor-insured’s lifetime exclusion.

Intentionally Defective Grantor Trust

An Intentionally Defective Grantor Trust (IDGT) places assets outside the grantor’s estate for inheritance tax purposes but is drafted so that income generated from the trust is taxable to the grantor. An IDGT allows the grantor to gift or sell assets to the trust and any appreciation grows tax free. Payment of income tax by the grantor allows the trust principal to grow and is not considered an additional gift to the beneficiaries.

Instead of using a portion of his or her estate tax exemption, the grantor can sell assets to the intentionally defective grantor trust in exchange for an interest-bearing promissory note. The grantor must first gift the trust with enough “seed” money so that the trust can afford to purchase the grantor’s assets. Since the IDGT is a grantor trust, the sale is not a taxable event. The note, if still existent at grantor’s death, further reduces the grantor’s taxable estate.

Qualified Personal Residence

A Qualified Personal Residence Trust (QPRT) is an irrevocable trust that holds a residence or vacation home. A grantor gifts the home to a QPRT, but retains the right to live in the house for a stated period of time. At the end of the term, the home is transferred to the grantor’s named beneficiaries. If the grantor wants to remain in the home, he or she must pay rent to the beneficiaries. In this way the grantor removes the home from his or her taxable estate and any appreciation in the property grows tax free. The term of years cannot be too long because if the grantor dies before the end of the period, the full value of the house will be included in the grantor’s estate – placing the grantor in the same position as he or she would have been by not creating the QPRT.

Spousal Limited Access Trust

A Spousal Limited Access Trust (SLAT) is an irrevocable trust created for the benefit of a spouse, with the objective of minimizing federal estate tax due on the donor spouse’s death. Although many clients want to take advantage of the historically high federal estate exemption, they shy away at transferring assets out of their estates for fear they may need the money at a later date. The SLAT largely eliminates this apprehension. Although the grantor is gifting away assets, the beneficiary spouse is entitled to income and principal distributions from the trust – thereby giving the grantor spouse indirect access to the trust. Although the spouse is the primary beneficiary, other family members can be included as beneficiaries. The grantor controls who the ultimate beneficiary is upon the donor spouse’s death.

SLATs are grantor trusts so the grantor pays all income tax on trust assets. This allows greater appreciation of principal, which is excluded from both spouse’s estate. If drafted correctly, SLATs also provide asset protection so that the assets are not reachable by creditors of the donor or beneficiary spouse. To avoid complications from a divorce, a SLAT can be drafted so that the beneficiary spouse is defined as the donor’s current spouse.

Grantor Retained Annuity Trust

A Grantor Retained Annuity Trust (GRAT) is used to remove assets out of the grantor’s estate by gifting the assets to family members – but not having to use any portion of the federal estate tax exemption. In exchange for the gift to the irrevocable trust, the grantor retains the right to an annuity for a specific term of years. The rate of return is specified by the IRS (known as the §7520 rate). A GRAT works best with assets that are expected to grow considerably in value, usually stocks or IPO shares, thus outperforming the IRS assumed rate of return.

At the end of the stated term, the beneficiaries receive the appreciated assets tax free. Since the grantor receives an annuity, the initial gift is either discounted or “zeroed out,” meaning it is not counted toward the grantor’s lifetime exemption amount.

It is important to discuss with an experienced estate planning attorney the best type of asset to transfer – as not just any asset is GRAT appropriate. Beneficiaries take the asset at the grantor’s basis, rather than getting a stepped-up basis, so low basis assets are not ideal.

Supplemental Needs Trust

A Supplemental Needs Trust allows beneficiaries to use money placed in a trust to “supplement” their lifestyle while retaining any need-based government benefits such as SSI, Medicaid, or Group Housing. Supplemental Needs Trusts can be established as “first-party” or “third-party trusts”.