Trusts Are More Than Legal Jargon – Summary of Four Common Trusts
By Lenise Major, CPA
There are a variety of different types of trusts that can be used to achieve diverse financial and tax objectives. Below is a small summary of four of the more commonly discussed trusts. Trusts have always been a great planning vehicle and can even provide opportunities for you to achieve non-financial objectives. It is important for you to convey all your objectives to your representatives when determining which trust is the best fit for you.
1. Revocable Living Trust – This is the most commonly used trust. Assets are transferred into the trust (simply by titling the asset in the trust’s name). The creator of the trust, known as the Grantor, retains the power to alter, amend or even revoke the trust at any time. At death the trust becomes irrevocable allowing all the assets of the trust to transfer to the beneficiaries without a need for probate. Avoiding probate costs can lead to substantial savings, and not only for the wealthy.
2. Charitable Remainder Trust/Charitable Lead Trust – Feeling charitable? Many find that they want to give a substantial amount to charity but an outright donation isn’t always the best solution. Charitable Remainder Trusts allow assets to be set-aside for the charity of the Grantor’s choosing but allows the Grantor to receive the income from the asset(s) during his/her life. A Charitable Lead Trust is just the inverse, while the charity receives an annual income distribution; the underlying assets are eventually distributed to beneficiaries designated by the Grantor (usually family members.)
3. Bypass or Credit Shelter Trust – This trust is set up to protect trust property from estate tax. Since estate tax planning is the primary focus, these trusts are generally used by more wealthy individuals. The trust is funded at death and generally has a value equal to the decedent’s applicable estate tax exclusion amount.
4. Crummy Trust – Where the Credit Shelter Trust is used for estate tax planning, the Crummy Trust is used for gift tax planning. The idea here is simple, gifts to children or grandchildren can be risky given their financial immaturity. However, making a gift to a trust that they will benefit from when they are older and more likely to make good financial decisions tends to be more desirable to the donor. The Crummy Trust is a vehicle used for precisely this purpose. The donor can make gifts to the trust and by allowing the donee a small window of “opportunity” to retrieve the money (know as Crummy letters), the gift then qualifies for the annual gift tax exclusion and the donor can rest easy knowing that the gifts are accumulating each year and will benefit the donees in the future.
Lenise Major is a Tax and Business Service Supervisor at Stone Carlie & Company, LLC, a CPA firm which has served the St. Louis area for over 50 years. Lenise can be contacted by calling 314-889-1269 or visit Stone Carlie at www.stonecarlie.com.