Ins and Outs of Trusts

Some of the public does not know what a trust is. Others think it is merely for the rich. Many others have come to me and said something like “I need a trust,” as if it is aspirin or some panacea. What most of the public (and most non-estate planning attorneys) don’t realize is that there are roughly 65 different types of trusts, some more broad than others, some quite specialized, and many share similar features. This brief overview should be a simple reminder for the seasoned practitioner, or a starting point for those new to the wonderful world of trusts.
First, let’s start with the basics – the Trust has three “points” – a Grantor (Settlor, Trustmaker), a Trustee, and one or more beneficiaries. The Grantor creates the trust, the Trustee carries out the instructions of the Trust, and the beneficiary benefits from the trust. In some circumstances, the Grantor may wear all three hats.
Grantor or Non-Grantor? Included in the estate or excluded? Available to the beneficiary? Beneficiary’s ability to control part or all of the trust? These probably rank highest in the architecture of the trust, so let’s attack those first.
Grantor Trust versus Non-Grantor Trust
A Grantor Trust is a trust where the grantor has retained certain control over the trust. Any trust income is taxed on the Grantor’s personal tax return (1040), at the Grantor’s personal income tax rates. Conversely, a Non-Grantor trust’s income is NOT taxed to the Grantor, and the trust is taxed at the compressed (usually higher) trust rates on a trust tax return (1041).
As the tables above illustrate, Non-Grantor trusts are taxed at the maximum marginal rate of 35% once they produce over $11,350/year in income, whereas an individual earning $11,350 would only be subject to a 15% tax, therefore care must be taken in the selection of a Non-Grantor Trust.
Estate Inclusion or Estate Exclusion
If the Grantor has certain rights or too much control, the trust will be included in the Grantor’s estate upon death. Estate inclusion may be desirable, for example, if the Grantor has a modest estate, and the assets have appreciated since the Grantor obtained same, by including the assets in the Estate there will be a “step up in basis” upon the Grantor’s death – in other words, if a share of stock cost the Grantor $10, and is worth $110 upon the Grantor’s death, the beneficiary will receive that stock at the $110 level, and can sell the stock for $110 without a capital gains tax; if the stock was placed in a trust excluded from the Grantor’s estate (a “completed gift”) then the beneficiary will receive the stock at the Grantor’s cost basis (being $10 in this example) and if the stock is sold for $110, there will be a capital gains of $100. The tug-of-war between estate inclusion and estate exclusion can be complicated, and it is strongly suggested that an experienced attorney is consulted on such matters to avoid significant tax errors (and malpractice).
Mixing and Matching Grantor and Non-Grantor and Estate Inclusion and Estate Exclusion
For some estates, and under certain circumstances, the family may be served by a variety of the above – for example, a Revocable Living Trust is a Grantor Trust (income taxed to the Grantor) and included in the Grantor’s estate. Income will be taxed at the Grantor’s personal rates, and the assets will enjoy a step up in basis upon the Grantor’s death. The same Grantor might also benefit from a “Medicaid Trust” which will often be a Grantor Trust (income taxed to the Grantor) yet the Grantor will have no control of the assets, and the assets may or may not be included in the Grantor’s estate upon death. Usually, with a small enough estate, the assets will be included in the Grantor’s estate (for Federal Estate Tax purposes) to enjoy the step up in basis. The same family could ALSO potentially benefit from a Medicaid Trust (or other trust) that might be a Grantor Trust (taxed to the Grantor) but yet excluded from the estate – non-appreciated assets would be more appropriate in that trust.
Beneficiary’s Access and Control
There are times we want the beneficiary to have control of the trust – perhaps they are the successor Trustee, and the trust is dynastic in nature intended to benefit the beneficiary (and perhaps beyond). Or perhaps it is a small family, and the Grantor wants assets controlled by family members who are also beneficiaries.
Then there may be times where we do NOT want the beneficiary to have any access – an example would be a Special Needs Trust (or Supplemental Needs Trust) where the beneficiary would lose means tested governmental benefits (such as Medicaid). In that instance, we want the Trustee to have very tight discretion and guidelines on how to help the beneficiary, without being “too helpful” and costing the beneficiary their benefits.
Interested Beneficiaries
In my practice, a large portion of our trusts involve Trustees who are also beneficiaries (Interested Trustees). The Trustee may be in charge of their own separate share, and/or also in charge of other beneficiary’s shares. For example, in a small family, perhaps the oldest child will be the initial trustee following the death of the Grantor(s), and there may be younger siblings, and in that example, the Trustee would be an Interested Trustee on the Trustee’s separate share, and an Independent Trustee (or Disinterested Trustee) on the shares of his/her siblings. When making distributions for him/herself, the Trustee will be limited to the “ascertainable standards” of their own Health, Education, Maintenance or Support (HEMS) – this “standard” provides “creditor and predator” protection from the trusts; one way to simplify is to say if the Trustee had completely unfettered access, the assets would be more like the Trustee’s own personal bank account than a trust. Regarding the sibling’s shares, the Trustee would be able to distribute assets for any reason that made sense to the Trustee, without breaking the protections of the Trust.
Conclusion
It is my hope this brief piece was able to clarify some nomenclature and where various trusts can make sense – as with any legal article, you should consult a qualified attorney when in doubt or before establishing your Trust.

Attorney Justin Peltier is a Massachusetts Estate Planning Attorney.  Please visit http://www.jpestateplanning.com/ for additional information.

This blog post was written by Gary B. Garland and can be seen here.

Estate and Asset Protection Planning Opportunities 2011-2012

The 2010 tax year certainly proved to be a challenge for estate planners due to the uncertainty of the estate tax and the generation-skipping transfer (GST) tax. However, with the enactment of the 2010 Tax Act there is a least a little more certainty over the next couple of years.
The new $5 million gift tax and generation skipping transfer tax exemptions provide a powerful gifting opportunity for clients in the next two years. Because the $5 million exemption is scheduled to expire in 2013, it is important for advisors to understand the estate planning techniques that should be explored with their clients before the expiration of these high exemption amounts.

In addition to the increased exemption amount, the 2010 Tax Act includes a provision giving the executor of the estate of a first spouse to die the option of shifting any unused estate tax exemption amount to the surviving spouse. Thus, for example, if the first spouse used only $3,000,000 of his $5,000,000 exemption amount, his estate could elect to have the remaining $2,000,000 pass to the surviving spouse, giving her a total of $7,000,000 of estate tax exemption. Although this portability provision seems simple on the surface, it introduces important planning considerations that will be discussed during this session.
With a good fundamental understanding of the current gift and generation skipping transfer tax exemption rules, one will be able to identify significant opportunities to shift wealth to future generations.

To visits me website for Massachusetts Estate Planning from a MA estate planning attorney go to http://www.jpestateplanning.com/


This post was written by Robert Keebler, CPA, MST, AEP and can be viewed here.

2011 Estate and Income Tax Figures

The following are some of the important tax rates and changes that are in effect for 2011:

- The 10%, 15%, 25%, 28%, 33% and 35% individual and trust tax rates have been extended for 2 years through December 31, 2012.

- The estate tax top rate is 35% with an exemption amount of $5 million

The Real Deal With the Estate Tax Ememption

The Federal Estate tax exemption for 2011-2012 is $5,000,000 per spouse.  Under previous law, in order to take advantage of both spouses exemptions, there needed to be proactive planning to take advantage of both exemptions.  This was often done through a testamentary trust being established by way of a will, or setting up a credit shelter trust during your lifetime.  This way both $5,000,000 exemptions would be passed to the next generation federal estate tax free (MA however has it's own state estate tax- see below).

      However, the new tax law signed by President Obama on Dec. 17 contained a great tax break for married couples.  Beginning January 1st, 2011 surviving spouses can add the unused portion of a deceased spouse's exemption to their own estate tax exemption and there is no need to have potentially expensive trusts.  So, for example, if one spouse dies, and leaves a taxable estate of $3.5 million, the "unused" balance of the deceased spouse's $5 million exemption is transferred to the surviving spouse for use at a later time. 

     How to do This-  To "port" a deceased spouse's exemption to the surviving spouse, the executor of the first deceased spouse's estate must file a federal estate tax return and make an election to allocate the unused exemption to the surviving spouse.
      The only catch with the new law is that, so far, portability is only available for two years - 2011 and 2012. It would be a wonderful thing is this portability feature was made permanent but for now we will just have to wait and see.

     Massachusetts has it's own Estate Tax Bite-  MA has an estate tax exemption of $1,000,000 per household.  So in this case anything over the $1MM threshold will be subject to MA estate taxes.  So if the gross estate of both spouses of $2,000,000 for example, taxes would be owed on the whole amount.  The tax rate is a progressive one that maxes out at 16%.

New MA Homestead Exemption effective 3/16/2011

Effective March 16, 2011 a new law, MGL Chapter 395, will provide changes to the current homestead law, some of the changes include:

·         Automatically protects up to $125,000 in home equity without filing

·         Protects up to $500,000 for those who file for homestead protection

·         Allows spouses to both file - currently only one may file

·         Clarifies that there is no need to re-file after refinancing

·         Provides coverage for homes kept in trusts.

According to the new law, all currently existing homesteads shall continue in full force and effect.  Updated Homestead Forms will be available shortly.

     What this Means: The Homestead act protects equity in your home from attachment from creditors who have an interest that is acquired after the homestead is filed, not those who already have an interest before the homestead is filed.  Mortgages (first and second) are exempt from the homestead exemption, MassHealth is also exempt.  You would generally be protected from other creditors, credit card debt, lawsuits, auto loans, and any other creditors not already exempt as named above.  The filing fee for a Homestead Declaration is $35, so the benefits far outweigh the cost.

The Costs and Consequences of not having a Will

Estate planning is one of those things everybody knows they should do, but a surprising number of people put it off until it’s too late, or do it wrong in the first place.

Too many people of all ages hesitate to have wills drawn up. There is no good reason to do that. If you die without a will, you will have lost the right to specify who inherits your property. In this situation, the state decides how your property will be distributed, and it is unlikely the allocation will match your preference. Moreover, in many states, the law will allocate your property in a way that may be not be fair to your spouse.

Some individuals feel that because they are married and own their property jointly, there is no need for a will. What if you and your spouse die together in an accident? Who will receive your property? If you have young children, who will become their guardian? If your young children inherit property, who will manage it?

It is important to know what property passes by will, and what does not. Any property owned with “rights of survivorship’’ goes to the other owner(s). Property with a named beneficiary goes to the party named. Any property disposed of by contract goes to the named owner(s). The provisions of your will do not override the preceding specifications. Any property you own individually that does not have a named beneficiary passes by will. Your will can also cover property you may not be aware of. For example, if you receive an inheritance or a legal settlement, the provisions of your will can address these assets.

Many advertisements suggest you can avoid legal fees by purchasing books, legal forms, or computer programs to create your will. In my opinion, that is foolish. If any mistakes are made, the will can be disallowed. A straightforward will is not expensive, and many attorneys won’t charge for an initial meeting. Reputable attorneys will provide you with a cost estimate after you provide basic information.

Is a Will Based Plan or a Trust Based Plan Better for Me

     Often clients will seek my estate planning guidance and a common initial question is whether a Will or a Trust is a better fit for them.  The answer, as you may imagine, is completely dependent on what the client wishes to accomplish and in what manner.

    A Will is able to name an executor of your estate, the beneficiaries of your estate, guardians for minor children, among other things.  I always say a first basic goal of estate planning is to avoid probate.  Why you might ask?  To most clients surprise, everything that passed through a Will is in fact subject to the probate process.  This means all assets that pass through your Will must be supervised by the probate court which involves probate costs to your estate or your heirs.  Additionally, probate is a public process and notices are published in newspapers and other materials to notify all heirs and potential creditors that they may be able to take a bite at the apple, your estate, by filing a claim against it.  Lastly, probate can take up to 12 months to formally close, which could result in up to a 1 year delay in your beneficiaries using and enjoying your property (assets, real property, personal property, etc.).  These are some of the downsides to a Will based plan.

     A Trust on the other hand (living trust, revocable trust, revocable living trust) is what I describe a Will on steroids.  It accomplishes everything a Will does, with some added protections.  A successor Trustee is named (called an executor or personal representative in a Will), beneficiaries are names, guardians for your children, etc.  There is no probate process with a Trust based plan, thus avoiding probate costs, avoiding any delays in distributing your assets to the trust beneficiaries, and the terms of the Trust are kept private and confidential.  There are some addition protections in a Trust based plan.  You can elect to stipulate to whom, in what manner, and when you beneficiaries receive the Trust proceeds.  It can be left outright to the beneficiary, or it can be kept in further Trust so as to allow beneficiaries to access their share at different stages or ages in life.  You can continue to "control the purse strings" of your estate well after your death.  Special needs provisions, estate tax savings provisions, and many other client specific interests can be provided for in a very efficient manner.

     After a brief discussion together we can discern whether a Will based or Trust based plan better fits your situation.  If you have no other estate planning documents, I always advise, whether a Will or a Trust is selected, looking into a package of ancillary documents which often include a Durable Power of Attorney, Massachusetts Health Care Proxy, Living Will, Homestead Declaration, and /or a HIPAA release.