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Helping You Understand Complex Types Of Trusts

Below is a wealth of information on various types of trusts that we can handle at Shimada Law.

For additional information on these or other estate planning matters, call us today at 503-863-2732 or contact our lawyer online. We represent clients in the Portland area and surrounding communities from our offices in Beaverton and Salem.

Irrevocable Trust

An irrevocable trust is a trust arrangement that cannot be undone (hence, the term “irrevocable”). In other words, when the grantor transfers property to the trustee of the irrevocable trust, it is a completed gift under property law and the grantor has no interest in and cannot withdraw that gift. Irrevocable trusts have countless variations and are used in order to minimize death tax liability and for asset protection purposes.

Irrevocable Life Insurance Trust

Irrevocable life insurance trusts (ILITs) are generally used in conjunction with other estate planning tools. They have many variations but function similarly to purchasing your life insurance independently. The key difference is that rather than owning your life insurance policy yourself, you purchase and maintain the policy through the trust. Because the grantor of the trust does not own the policy in their name, it is not included in the grantor’s estate. This can have significant tax benefits and can complement other strategic estate planning moves.

Spousal Lifetime Access Trust

The spousal lifetime access trust (SLAT) is a variation of the ILIT that gives a surviving spouse access to the trust funds.

  • Example: A grantor-husband settles an SLAT with his wife and children as beneficiaries. The SLAT purchases a life insurance policy on the life of the grantor-husband. When the grantor-husband dies, the SLAT funds (to include the life insurance payout) are not in the grantor’s estate (and thus not subject to estate tax), and his surviving spouse has access to the insurance funds in the SLAT for her life. When the surviving spouse dies, the children take the remainder of the SLAT funds.

Grantor Retained Annuity Trust

A grantor retained annuity trust (GRAT) is a highly sophisticated irrevocable trust/private annuity combination that can provide for reduced gift tax transfers. Without boring you with the complexities of the GRAT, let me just tell you generally when a GRAT is beneficial for a person: When (1) the grantor is worth over $5.25 million (or if married over $10.5 million), and (2) the grantor is very confident they own assets that they could transfer to the GRAT that will appreciate more than the current §7520 applicable federal rate (AFR) (the October 2013 AFR is 2.4%). Complex actuary tables published by the IRS are used to determine the value of the gift made by the grantor (taking into account the amount and frequency of annuity payment, and sometimes the age of the grantor, etc.).

  • Example: A grantor, age 60, settles a GRAT and funds it with $500,000 of high-yield bonds, with annuity payments of $25,000 to be paid at the end of each year for 10 years. The GRAT is settled in a month when the AFR is 2.6%. Using the IRS tables, we determine that the remainder of the trust property has a present value of $297,802.50, which means the grantor pays gift tax on that $297,802.50. Assuming the grantor survives the 10-year term, the beneficiaries of the GRAT (likely the children of the grantor) take $500,000 of bonds. Because the grantor paid gift tax on only $297,802.50, they saved gift tax on $202,197.50, which equals roughly $80,879.20 of gift tax savings (all for a nominal price of settling the GRAT).
  • If your net worth is less than the amounts listed above, we believe we can offer you better options. There are several variations of the GRAT, and we can help you determine what kind of GRAT is best for you (if any).

Installment Sale To An Intentional Grantor Trust (IGT)

An installment sale to an intentional grantor trust (IGT) achieves essentially the same thing that a GRAT does (reduced gift tax transfer of wealth) but in a vastly different way. Here, the grantor sells an asset to the IGT in exchange for a promissory note, which is generally structured to make payments of principal and interest in installments (interest rate is determined according to §1274 – October 2013 rate is between 0.32% and 3.5%, depending on the duration of the promissory note). The note is structured so that the grantor receives payments for the exact amount of the sale plus interest, which means the trust property in excess of the principal and interest payments stays in trust for the beneficiaries and passes gift tax-free. An IGT may be beneficial to a person similarly situated to the person described above in the GRAT scenario. However, depending on the term of years, using the IGT’s §1274 rate may be more beneficial than the GRAT’s §7520 rate.

  • Example: A grantor settles an IGT and sells (on installment) their rental property worth $1 million to the IGT on a 20-year term when the §1274 AFR is 2.6%. In exchange, the IGT gives the grantor a promissory note for $1,670,887.52 ($1 million plus 2.6% interest, compounded annually), payable in monthly payments of $6,962.03. At the end of the 20-year term, the investment property is worth $2.5 million. Thus, the IGT beneficiaries (generally the grantor’s children) take the investment property and the grantor paid no gift tax on the $829,112.48 gift (the difference between the value of property at the end of term and the amount paid to the grantor in installment payments). Had the grantor not sold their property to an IGT but held on to it for 20 years and then gifted it (either while still alive or a testamentary gift), the property could have been liable for gift or estate tax of $331,645 (40% of $829,112.48).

Charitable Remainder Trust

A charitable remainder trust (CRT) functions similarly to a GRAT, except here, the annuity payments go to the beneficiary and the remainder interest goes to a charity. Because the remainder goes to the charity, the grantor receives deductions for both income tax and gift tax for the value of the charitable remainder interest. As with the GRAT, the §7520 AFR is used in conjunction with actuarial tables published by the IRS. CRTs have many variations and are commonly used by high net worth individuals with appreciated assets.

  • Example: The grantor settles a CRT and funds with marketable securities worth $200,000, with an adjusted basis of $50,000. The trust provides for an 8% annuity to be paid to the beneficiary (the grantor’s child) annually for 20 years and then for the remainder to pass to a qualified charity. The AFR is 7%. The CRT sells the securities for $200,000 and invests the entire sum in corporate bonds that yield $15,000 per year in interest. The beneficiary receives $14,000 per year for 20 years (totaling $280,000), and the grantor receives a $40,548 income tax deduction. The grantor has also made a $159,452 taxable gift to a child (instead of paying gift tax of 40% on $280,000). Had the grantor given the child the stock and had the child sold the stock for $200,000, the child would have had to pay $30,000 in capital gains taxes and would have had only $170,000 to invest.

Crummey Trust

Crummey trusts are an excellent tool for high net worth individuals to avoid or eliminate death taxes. Here’s how it works: When a grantor makes a gift to an irrevocable trust, the gift is complete for state property law purposes but does not necessarily meet the requirements under the internal revenue code to avoid the gift tax. The internal revenue code requires a “present interest” be given (as opposed to a “future interest”). Because most irrevocable trusts afford the beneficiaries a future interest (i.e., “the trustee shall distribute trust property to the beneficiary when the beneficiary reaches 35 years of age”), the grantor’s gift to the irrevocable trust does not qualify for the annual $14,000 gift tax exclusion. The Crummey trust (named after a party in a court case – not because the trust is “crummy”) is an irrevocable trust that creates a present interest in the gift, because by the terms of the trust agreement, the beneficiaries have a period of time to withdraw the grantor’s gift to the trust. If the gift is not withdrawn, then it lapses into the rest of the trust property.

  • An example of regular irrevocable trust: A grantor settles an irrevocable trust and contributes $14,000 each year to the trust. The grantor is responsible for paying a gift tax of 40% of $14,000 ($5600) each year.
  • An example of Crummey trust: A grantor settles a Crummey trust, and he and his wife contribute $14,000 each year to the trust for each of their three beneficiary children. The beneficiaries have notice of the power to withdraw and they refuse to each year. A $14,000 gift to the trust for each child beneficiary from each parent equals $84,000 per year in total gifts. Twenty years of such gifts equal $1.68 million that has been transferred to the trust and removed from the estate of the grantor-parents, not to mention all of the interest that the money would accumulate. A modest interest rate may put that number to $2.5 million. If parents did not settle a Crummey trust, their estate could be liable (depending on its size) for 40% estate tax on that $2.5 million ($1 million). In other words, this hypothetical couple could have saved $1 million in estate taxes all for a nominal attorneys’ fee of setting up a Crummey trust.