Establishing a trust can be used to provide investment management of assets, protect assets from a beneficiary’s creditor claims or subject trust assets to claims in a divorce. Trusts are commonly established to preserve and protect wealth, provide for minor-aged, elderly or handicapped beneficiaries. Special consideration in planning with trusts include the following:
Blended and Non-Traditional Marriages
Blended or non-traditional marriages frequently call for special trust considerations to satisfy client’s goals equitably and efficiently; Specialized Marital Trusts or Credit Shelter Trusts can provide for a surviving spouse/partner and children from prior marriages.
Special Needs Trust
A Special Needs Trust may be warranted to preserve eligibility for certain benefits such as Medicaid of Supplemental Social Security where a beneficiary has special needs.
Closely-Held Family Business/Investments
Trusts have traditionally been used to protect closely-held family businesses and/or investments for generations. Fiduciary income tax planning is of significant import in using trusts. An active trade of business interest held in trust may qualify for pass-through of the trust share of qualified business deduction under Section 199A of the Tax Cuts and Jobs Act of 2017. While many individuals may not qualify for pass through of this deduction because of income limitations for the qualified business deduction, generally a trust may qualify for the deduction to offset income. Likewise, careful planning is needed for passive investment income. In addition to the accelerated compressed income tax rates imposed on trusts, trusts are further subject to the net investment income tax at a very low threshold. As a consequence, care is needed in fiduciary income tax planning for trusts.
Retirement Accounts including IRAs
Inclusion of retirement accounts, including Individual Retirement Accounts (IRAs) in trust can help protect assets until they are distributed to beneficiaries. However, care must be taken to avoid unwary income tax consequences upon the outright distribution of a share of retirement accounts to allow for continuation of income tax deferral status when there is more than one beneficiary.
Defective Grantor Trusts (i.e., GRATS)
Defective Grantor Trusts are used often in planning for larger more complex estates to transfer growth assets out of an otherwise taxable estate and minimize Gift taxes associated with the transfer.
Irrevocable Life Insurance Trusts/ Irrevocable Grantor Trusts
When planning for liquidity for more complex estates, Irrevocable Life Insurance Trusts may allow insurance proceeds to be received outside of an otherwise taxable estate. Irrevocable Grantor Trusts can also be used for life insurance and allow the grantor the flexibility of replacing life insurance with comparable growth assets.