32 Types of Trusts. What Types of Trusts Do You Need. How Trusts are Taxed for Estate, Gift and Income Tax Purposes

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1 32 Types of Trusts What Types of Trusts Do You Need How Trusts are Taxed for Estate, Gift and Income Tax Purposes Kenneth R. Cohen, Esq. Davidson, Sochor, Ragsdale & Cohen, LLC 611 River Drive, Elmwood Park, NJ Tel. (201) lawyer.com

2 MARITAL DEDUCTION ESTATE TAX GENERATION SKIPPING LIFE INSURANCE QTIP Credit Shelter Trust GST LIT Estate Trust Disclaimer Trust Reverse QTIP Second to Die LIT QDOT CHARITABLE GIFT TAX S CORP STATE INCOME TAX CLUT CLAT NIMCRUT CRUT CRAT NIMCRAT GRIT GRAT GRUT Defective Grantor Trust Crummey Trust QSST ESBT Non-Domestic MEDICAID SSI Supplemental Needs Special Needs MARITAL NONTAX Elective Share Trust Alimony Trust OTHER NONTAX Age Restrictions Spend Thrift Asset Protection Living Trust Pet Trust Kenneth R. Cohen, Esq., Davidson, Sochor, Ragsdale & Cohen, LLC Elmwood Park, NJ Tel kcohen@dsrclaw.com

3 Example - Living Trust Example - Defective Grantor Trust INCOMPLETE GIFT GRANTOR TAXED ON INCOME COMPLETED GIFT GRANTOR TAXED ON INCOME Example - Effective Trust Example - 3 rd Party Beneficiary Trust INCOMPLETE GIFT GRANTOR NOT TAXED ON INCOME COMPLETED GIFT GRANTOR NOT TAXED ON INCOME

4 What is a Trust? A trust is an arrangement between the creator of the trust (referred to as either the grantor or settlor) and another person (trustee), in which the grantor gives property to the trustee which the trustee is directed to hold, administer and distribute for the benefit of another person (the beneficiary of the trust).

5 COMMON FEATURES OF ALL TRUSTS Common Features All Trusts have a Grantor (the person who contributes property to the Trust) All Trusts have a Trustee All Trusts have a Beneficiary All Trusts have property administered by the Trustee Optional Features Trusts may have a Protector Trusts may have a separate Investment Advisor

6 A PERSON CAN UNDERTAKE ONE OR MORE ROLES IN THE TRUST.

7 WHAT IS THE PURPOSE FOR MAKING THE TRUST? To Provide Assistance In Handling Assets. This could be for a person with physical or mental challenges. It could be for a person who the donor thinks is too young (immature) to make spending decisions. It could before a person who is irresponsible when it comes to handling money (spendthrift trust). To Provide Assistance in investing the Assets. The investment advisor can be the trustee or an independent third party financial advisor. Protect the Assets from the Claims of Creditors. Beneficiaries who already have judgment debts against them. Beneficiaries who are engaged in high risk occupations. Beneficiaries who may qualify for governmental entitlements based on financial means.

8 Protect the Assets from the Claims of Creditors (continued) Protect assets for children of first marriage where the party remarries. Protect the Grantor from potential creditors (self settled asset protection trust. Protect Assets from Estate Taxes Credit Shelter Trust Trust for surviving spouse (QTIP Trust) Provide for post mortem planning (Disclaimer Trust) Preserve marital deduction where surviving spouse is not a US citizen (QDOT) Protect assets from Generation Skipping Tax. Protecting Life Insurance Proceeds from Estate Tax First to die life insurance trust Second to die life insurance trust. Proceeds are paid on the death of the second spouse to die. This is traditionally used to pay estate taxes on the death of the second spouse.

9 Charitable Giving Charitable giving coupled with intent to save income taxes on income stream retained by the Grantor (Charitable Remainder Trust) Charitable giving with intent to transfer future appreciation in value to noncharitable beneficiaries (charitable lead trust) Reduce Gift Taxes Grantor retained income trusts To facilitate sales from the Grantor without paying income tax (Defective Grantor Trusts) To take advantage of the $14,000 annual gift tax exclusion (Crummey Trusts) Avoid Payment of State Income Tax Self settled asset protection trusts in states such as Delaware (Dings) and Nevada (Nings)

10 Living Trusts Used to Avoid Probate Assets held in living trusts avoid probate when the grantor dies (Useful when grantor owns real estate in another jurisdiction) To avoid New Jersey s lien on decedent s bank accounts and brokerage accounts when the decedent dies Living trusts provide confidentiality because they are not probated Living trusts may reduce the amount of time to administer the decedent s affairs (especially true in states such as Florida and NY) Living trusts may reduce the costs to administer the estate Living trusts provide a seamless transition to have a successor trustee handle the grantor s affairs if the grantor becomes incapable of handling his own affairs.

11 TRUST FEATURES Is the Trust Revocable or Irrevocable? Does the trust become irrevocable upon occurrence of an event? Who are the beneficiaries? Is the Grantor a beneficiary? Is the Grantor s spouse a beneficiary? Are there beneficiaries who are two generations younger than the Grantor? Who are the Trustees? Is the Grantor a Trustee? Is the Grantor s spouse a Trustee? Is a Beneficiary serving as Trustee?

12 TRUST FEATURES (cont d) What type of assets are held by the trust? Personal residence Life insurance S corporation stock What is the jurisdiction of the Trust? Asset protection consequences Income tax consequences When does the trust become effective? At death under the Grantor s Will During Grantor s lifetime under an inter vivos trust