The beginning of 2011 saw changes in the federal estate taxes law which makes gifting much more attractive for all citizens, but for folks like you and me, the question always arises is what do I need a trust for? Here are a few examples with a short analysis.
1. Charitable Lead Annuity Trust. The charitable lead annuity trust can be set up in life or at death. The purpose of the trust is to make annual income payments to a specific charity for a specific amount of time. What’s left goes to specific beneficiaries. The donor of the trust may take a charitable deduction and low interest rates help donors reduce gift taxes.
2. The Credit Shelter Trust. A credit shelter trust is set up by a married couple. Each couple sets up one trust for each spouse ensuring that heirs benefit from the entire estate tax exemption under both partners. This can be done to take advantage of either the Ohio estate tax or if applicable the federal estate tax.
3. Dynasty Trust. A dynasty trust is an irrevocable trust that is set up so that it can benefit multiple generations and theoretically could exist forever. If a dynasty trust is structured properly, these trusts can avoid estate or general skipping taxes.
4. Grantor Retained Annuity Trust. The grantor retained annuity trust is a mechanism by which principal is returned to the giver. If the asset held in trust appreciates in value, the trust pays the giver a preset interest payment. The extra appreciation is tax free and goes to the beneficiaries. GRATS as they are known are appropriate for donors who don’t want to part with principal or those who want to transfer more than their individual exemption if they can be structured with no gift tax consequences.
5. Grantor Trust. A grantor trust allows the donors to a trust to pay capital gains and income taxes on investments in the trust for the beneficiaries. Grantor trusts are attractive because the IRS does not consider payments for capital gains and income taxes as gifts and so grantor trusts provide a unique and beneficial way to transfer some wealth.
6. Qualified Personal Residence Trust. In a qualified personal residence trust, a donor can give away his home to his beneficiaries at a discount to current market value and also transfer future appreciation free of taxes. The person giving the house remains the home’s owner for the term of the trust. After that term, the donor must either pay rent or move away, but rent can be another way to give more money to the beneficiaries.
7. Qualified Terminable Interest Property Trust. The qualified terminable interest property trust is most often used by individuals that have children from a prior marriage. This trust provides a surviving spouse with income and sometimes part of the trust principal free of estate tax. The donor retains control over who gets to inherit the remaining assets after the survivor dies then they are subject to the estate tax.
8. Intentionally Defective Grantor Trust. Using an intentionally defective grantor trust is a way to transfer more than $5 million per individual to their heirs. The donor starts by gifting into a trust and then lending the trust up to 10 times more to buy a particular asset. If the asset appreciates, the trust can cover the loan with what is left going to the beneficiaries.