Tip:
Highlight text to annotate it
X
Meador: What are some of the common types of trusts that, as a certified
financial planner, I might see that come into my office?
Peterson: There's several, so one of them that you probably will see
from some clients is an irrevocable trust. They might come in with a,
what we would call an Inter vivos irrevocable trust, which again, just
means a trust that they started during their lifetime and that cannot be
changed or revoked.
Meador: Okay.
Peterson: So usually, when you're using irrevocable trust, what you're
doing is you are trying to take advantage of gift tax exemptions or
estate tax exemptions to transfer sums or assets. A lot of times,
appreciating assets to your loved one, the people that you ultimately
want to inherit them. And typically, you'll sometimes hear Crummey
trust.
Meador: Okay.
Peterson: The name Crummey comes from the guy whose name was on the case
where the IRS got approved, but anyway, what a Crummey trust is, or what
a Crummey power is, is you're giving something to an irrevocable, inter
vivos trust, and the beneficiary has a limited right to withdraw that
contribution. Usually, it's a 30-day period where they kind of have a
window where you contribute. They have 30 days where they can withdraw
the contribution, and then if they don't withdraw the contribution, that
contribution sits in the trust and can be invested and gain either
appreciation or income inside the trust.
And so it can be a. . . Irrevocable trust can be a very powerful way to
move today's dollars for loved ones' benefits at a gift or estate tax
advantaged amount, and then allow that appreciation to occur outside of
your gross estate.
Meador: Okay.
Peterson: It can be a really good thing. Now, that's going to apply. .
. Most of the people that you're going to see with an irrevocable trust
are going to have pretty significant assets. It's not something that
most people do just kind of right off the shelf. It's a more expensive
form of planning. The one kind of drawback of those irrevocable trusts
are that they are irrevocable. So you can't change them, you can't
modify them, you can't terminate them. And you can't pull the stuff
back out of them. And so besides not being able to change them, you
have lost control of them.
So most of the IRS cases that you'll see on irrevocable trusts will say
that in order for it to be truly irrevocable, you can't be the
beneficiary of it and you can't be the trustee of it. And so usually,
when we're doing those kinds of tax planned irrevocable trusts, they're
going to have to find somebody besides them to be the trustee and be in
control. Sometimes, clients don't like that lack of control function,
epecially ones that have built substantial net worth.
Meador: You're right, right.
Peterson: Another common one that you're going to see in your office and
which has really good opportunities for you as a financial planner is an
irrevocable life insurance trust, kind of the shorthand is an ILIT. And
so an ILIT is a great method for planning for estate taxes. So someone
who's going to have an estate that is subject to estate taxes, what you
can do is you buy an insurance policy inside the trust, and so the trust
is the owner of the insurance policy. Now, the person's whose life is
insured is usually the person who is setting up the trust.
Meador: Right.
Peterson: And what that person does is every year, they would gift the
premium, the insurance policy premium amount to the trust, which is
usually an amount less than the gift tax exclusion, annual exclusion.
So less than $14,000 a year and the trust will then pay the premium to
the insurance company, and then when the insured's life ends, then the
policy is going to pay out to that trust and then typically, that trust
is going to terminate and the proceeds from the life insurance policy
are going to pass to the beneficiary without any kind of tax.
And the nice thing about it is because it's in an irrevocable trust,
it's not included in the insured person's gross estate or estate tax
purposes. So a lot of times, what we'll do, is somebody who has a
very large estate will figure out, this is how much they're probably
going to owe in estate taxes and we'll use the ILIT to insure against
that risk so that the kids have a ready source of money to pay the
estate taxes. So you'll see this a lot like family that maybe has a
ranch or a family farm that they want to retain as one piece and not
have to sell any parts of it. So a lot of times, what you'll see is
using an ILIT to provide for those estate taxes so that the family land
can be kept together. So that's a really good method of doing it.
Meador: That's a great idea.
Peterson: Another typical one that you're going to see as part of
peoples estate plan is another form of estate tax planning, which is the
bypass or credit shelter trust. This could be an inter vivos trust so
one made during your lifetime, but most of the time, we see it as a
testamentary trust, one that's included in the will or revocable trust.
Sometimes, it's referred to as a B trust. Essentially, what you're doing
is everyone gets a certain level of estate tax exemption. Right now,
it's $5 and a quarter million and so I can pass estate tax free to my
children, $5 and a quarter million. When you're a husband and wife, you
can double up that exemption amount. So you can take a $5 and a quarter
million exemption and turn it into a $10 and a half million exemption.
So what you're using is the bypass or credit shelter trust in order to
double that exemption. So you'll see that a lot in peoples estate
planning if they have estates that are at least the $5 million limit.
Now, it used to be that limit. When I started practicing law, it was
$650,000.
Meador: Yeah, we saw a lot of bypass trust.
Peterson: Yeah. And so pretty much everybody's will had a bypass trust
in it for a long period of time. Another one that you'll typically see
is what's called a, Q TIP Trust or qualified terminal interest property
trust, which is a mouthful. So just call it a QTIP. Typically, we see
these included in a revocable trust or in a will, and they'll be a
testamentary trust so they'll spring into being once the person passes
away. They're created at the first spouse's death, and what you do is
you put the money into the QTIP trust, which comes into being, and it's
for the remainder beneficiary. So usually, the kids, but the surviving
spouse gets the income from the trust. And then once the surviving
spouse dies, then whatever is left is going to go to the kids.
So this is a great tool especially in second marriages because you can
provide income to the second wife, let's say, but you can have the
remainder beneficiary be the kids from the first marriage. So this is a
great planning tool for couples who have divorces in their past and are
on second or third spouses. Kind of the last one that you'll see from
time-to-time is what's called the Legacy Trust or Dynasty Trust." And
really, what that is, is a trust that's designed to last for a long,
long period of time. And what they're trying to do is give beneficiaries
at multiple generational levels the opportunity to use the assets of the
trust while at the same time, not paying transfer taxes from generation
to generation. And so if you see somebody walk in with a Legacy or
Dynasty Trust, they're going to be a great financial planning client for
you because they have a lot of money.