Revocable Living Trust
The living trust, also known as a revocable living trust, is a written legal document similar to a will that sets forth your wishes and plans regarding matters during your life (what happen if I become incapacitated) and upon your death (who will inherit what and when). Your wishes and plans can be changed during your lifetime as your circumstances change. By creating a customized estate plan, which includes a living trust, you will have peace of mind that your wishes will be fulfilled upon your death. Read more…(go to “Do I Need a Living Trust”)
An Irrevocable Trust is used as an asset protection tool…although it removes assets from your estate and therefore creditors cannot access those assets, it also requires that you give up control of the asset. Irrevocable Trusts are used in a variety of situations, but commonly in conjunction with gifting strategies, for example to establish trusts for children or grandchildren. Using this technique, an individual trust would be created for each child or grandchild. Each trust will state the trust’s purpose (e.g., to provide for education, a wedding, health care, etc.) and terms (e.g., the child cannot receive distributions until they receive a Bachelors degree). Each year you will fund each trust with your annual gift tax exclusion (currently $14,000). Your contribution will be held in trust and invested. The appreciation as well as the transferred funds themselves will remain outside of your taxable estate.
This option will provide you with the ability to transfer funds out of your estate for estate tax purposes while allowing you to fully utilize your annual tax-free gifts. Further, you will have the ability transfer wealth to your grandchildren during your lifetime and retain control as to how the money is used.
Irrevocable Life Insurance Trust (ILIT)
An ILIT is a trust that owns life insurance policies and thus removes the policy proceeds from the insured’s estate that would otherwise be included for estate tax purposes. The ILIT is established and funded with one or more life insurance policies. The ILIT is the beneficiary of the life insurance policy, but the terms of the trust determine who can actually own the policy proceeds.
Special Needs Trust (SNT)
If you have a child with special needs who receives public benefits such as SSI, Medicaid, or Medi-Cal, it is crucial that you plan for the transition of your estate with a Special Needs Trust. If you were to die and a special needs child were to inherit a part or all of your estate, that inheritance will disqualify the child from receiving public benefits. But if a Special Needs Trust is used, the funds inherited by the special needs child will NOT disqualify the child from public benefits, provided the trust is drafted correctly. There are three types of Special Needs Trusts:
1) A SNT included in your own personal trust;
2) A “Stand-alone” SNT which allows others (grandparents, siblings, relatives) to leave money to the child
3) A “First Party SNT” which is a SNT that allows the child to place their own assets in a Special Needs Trust, to prevent them from being disqualified from public benefits if they inherit or receive proceeds as a result of a lawsuit, or winning the lottery.
Our firm will help you design the best SNT for your child and situation.
Qualified Domestic Trust (QDOT)
If you are married, and one of you is a non-citizen, then when one of you dies, the surviving non-citizen spouse must pay estate taxes on the property he or she inherits, depending on the size of the estate. This tax usually begins at 40% and increases with the value of the estate. This is in contrast to the situation where a U.S. citizen spouse dies and the surviving U.S. citizen spouse (or resident alien) receives an unlimited “Marital Deduction” meaning that the surviving spouse can inherit any amount from a spouse without any tax consequences.
For non-citizens, the only way to avoid this outright taxation is by having a Living Trust along with a QDOT (Qualified Domestic Trust). This trust is for the unlimited use of the surviving spouse but has certain requirements in order to qualify for tax deferred status. Federal tax law currently requires that property given to a noncitizen spouse be in a trust having a U.S. citizen (or U.S. corporation) as a trustee in order that the property qualifies for the federal estate tax marital deduction. Basically, this requirement is so that the IRS can collect, from either the trust or the trustee who is a citizen, the estate taxes due on the trust when a noncitizen spouse later dies.
Estate Taxes on Second Death with a QDOT: Every U.S. citizen receives a Federal Estate Tax Exemption of $5,490,000. In other words, upon death, each U.S. citizen can pass up to $5,490,000 on to their heirs without any Federal Estate Tax. However, a non-citizen must be a resident (ie., hold an Alien Registration Card, commonly referred to as a “Green Card,” or meet other “tests” of residency) to have the right to claim the $5,490,000 federal estate tax exemption. This means, that with proper planning, a husband and wife who are non-citizen residents can pass up to $10,980,000 to their heirs without any federal estate tax on the second person’s death. If you are not a resident, this exemption is not applicable and your entire estate will be taxed on the second person’s death.
California law provides a specific statute for providing a trust for those families who count their pets as one of their own children and who want to leave funds for the care of a pet. These trusts are known as Honorary Pet Trusts, and can be designed to ensure the loving care and longevity of your pet, and providing for alternate distribution of the trust funds once the pet dies.
Charitable Remainder/Lead Trust
A charitable remainder trust (“CRT”) is a trust that allows an individual to donate property to the trust and the trust, in turn, provides an income stream to the donor for his/her/their lifetime; and on death, the balance of the assets in the CRT are transferred to charities of the donor’s choice.There are two types of CRTs; (1) a charitable remainder annuity trust (“CRAT”) and (2) a charitable remainder unitrust (“CRUT”). They operate exactly the same way except that the CRAT pays a fixed amount as an income stream each year, over the life of the trust, where as the CRUT pays out a fixed percentage, at least five percent (5%) of the fair market value of the property in the trust, over the life of the trust.If the gift is made during the donor’s lifetime, an income tax charitable deduction, equal to the fair market value of the amount that will eventually pass to charity, subject to the charitable deduction limitations, will be allowed. (The limitation on an individual’s income tax deduction is limited to fifty percent (50%) of the taxpayer’s adjusted gross income if the donation is to a private charity and will be limited to thirty percent (30%) of the taxpayer’s adjusted gross income if the donation is made to a private foundation. Any deduction not used in the year of transfer can be carried forward for the next five years.)A CRT can be funded with most assets. Generally, an individual will fund a CRT with a substantially appreciated asset or assets that are likely to appreciate in the future. In this way the donor is freeing his/her estate from additional estate tax on the appreciation. Additionally, a CRT does not pay any capital gains taxes and therefore is an ideal vehicle for selling substantially appreciated assets. If real estate is transferred to the CRT, and the donor does not want the real estate to be sold (such as transferring an apartment complex to the CRT), there must be a sufficient income stream from the asset to satisfy the income payments to the grantor/non-charitable beneficiary.A donor’s children (or other heirs) may not be wild about this strategy, because they will receive nothing in the deal. To assuage the situation, a life insurance policy can be bought naming their children/heirs as beneficiaries, and using the strategies outlined in the Irrevocable Life Insurance Trust. The income stream from the CRT can be used to make the life insurance premium payments. The policy would act as a wealth replacement vehicle and the donors will have effectively passed the value of the asset to their children gift and estate tax free while reducing the value of their estate for estate tax purposes and leaving a valuable gift to charity.A charitable lead trust (CLT) is the reverse of a CRT. With a CLT, the donor transfers property to the CLT which pays either a fixed amount or an annual percentage of the property to a charity for a term of years or for the lifetime of the donor. At the end of the trust term the remaining assets in the trust and any appreciation that has been realized pass to the beneficiaries of the donor’s choice, typically the donor’s children. Although there is typically no income tax deduction to the donor on the creation of a CLT, the donor’s estate and gift tax is greatly reduced (Typically, a CLT is structured as a “non-grantor” trust. In other words, all of the income generated by the CLT will be taxable to the trust itself, not to the donor. The trust will then receive the deduction instead of the donor. This is not to say that the CLT cannot be structured as a “grantor” trust allowing for the donor to receive the deduction. However, for reasons beyond the scope of this discussion they are typically structured as “non-grantor” trusts. ). The donor will pay gift tax on the value of the property that eventually passes to the chosen beneficiaries. However, the donor can utilize his gift tax exclusion to reduce this amount.
Qualified Personal Residence Trust (QPRT)
A Qualified Personal Residence Trust (QPRT) is a useful tool for transferring the primary residence or vacation home to a transferee during life while reducing the gift tax that would otherwise be applicable. The IRS specifically allows the use of a QPRT under section 25.2702-5(b) of the IRC. The grantor transfers his/her primary residence to a QPRT with the retained right to use the home for a period of years. At the end of the term of years the primary residence will be owned outright by the remainder beneficiary, presumably the donor’s children. For valuation purposes, the remainder interest (the value of the gift) will be substantially less than transferring the property outright. Therefore, the gift tax will be substantially reduced.
Private Family Foundation
A private family foundation is a separate tax-exempt entity, afforded tax-exempt status under section 501(c)(3) of the Internal Revenue Code, created for the purpose of charitable giving. There is great flexibility in how the money contributed to a private family foundation may be used. Families sometimes use a private family foundation as an opportunity in which family members can collectively work toward common charitable goals and as a way to leave a legacy of charitable giving to future family generations.A private family foundation can be established during life or at death. You decide the charitable purpose of the private family foundation and the foundation applies for qualification as a 501(c)(3) charity. If the foundation is established during your life you will make contributions to the foundation. The contributions may be used as a current income tax deduction, limited to the applicable amounts. If the foundation is established at your death, DenHerder & Associates can amend your estate plan so that a private family foundation will be established only to the amount necessary so that no estate taxes are paid upon your death. The private family foundation rules require a minimum of five percent (5%) of the assets of the foundation be distributed to qualified charities each year. The assets in the foundation are invested in the manner you chose (subject to certain rules). Ostensibly, the assets in the foundation will deliver a return greater than the amount you are required to give. Thus, the foundation can last for generations to come.Whether the foundation is established during life, or at death, your children, or whomever you choose, can sit on the board and can be paid a salary for their time and effort in this position. This salary can act as a vehicle to create an income stream for your children/heirs. Although the income will be taxed to your children/heirs as ordinary income, the income tax rate is less than the estate tax rate. In addition, some families use the Foundation to hold annual meetings in various locations around the world, paid for by the foundation. (Note: a family must be careful to document the business purpose and necessity for the travel, such as leaving a sizable donation at the location visited).The use of a private family foundation can be an excellent way to bring a family together to discuss, investigate and wisely choose charities to which to give. It can be a tool to bring younger generations to the Board to train them for a lifetime habit of responsible giving.All charities, public and private, prior to 1969 have had limitations on how large of an income tax deduction you can take for charitable contributions. Before 1969 there was an unlimited deduction, and you could, in essence, eliminate all income tax if you were so charitably inclined. The current limitations for charitable deductions are based upon a percentage of your adjusted gross income as follows: (1) Fifty Percent (50%) Limitation: This is the maximum limitation that is available for all contributions to public charities, and private operating foundations; (2) Thirty Percent (30%)Limitation: This limitation applies to contributions to semipublic charities, private foundations, and to contributions “for the use of” any charitable organization; (3) Twenty Percent (20%)Limitation: This limitation applies to contributions of appreciated property to semi-public charities and to private foundations. There is also an offset against 3% of your adjusted gross income after it exceeds a certain level. ($142,700 married filing joint, $71,350 if married filing separately).