Preserving and Protecting Family Wealth

The Value of Trusts

Trusts are effective wealth planning tools that can help preserve and protect family wealth for generations. With so many different types of trusts, it is important to understand your options so you can make an informed decision about trusts that meet your needs as well as those of your family.

Trust Structures

Trusts play an integral role in wealth and tax planning, philanthropy and asset protection. There are two basic structures, revocable and irrevocable.

Revocable Trust

A revocable trust offers control, flexibility and continuity. It allows you to:

• Determine what assets are titled in the name of the trust.
• Act as trustee until you are no longer willing or able to do so, at which time a successor trustee assumes management of the trust.
• Terminate or amend the trust’s terms at any time.
• Avoid the sometimes costly and time-consuming probate process for all assets in the trust.
• Distribute trust assets to your beneficiaries upon your death or, if desired, move the assets into separate irrevocable trusts for their benefit.
• Protect your privacy, as in most states the trust terms, assets and values remain private and not part of the public record (unlike a will).

Irrevocable Trust

An irrevocable trust frequently is designed to minimize estate taxes and protect assets. When assets are moved into a traditional completed gift form of irrevocable trust, the assets and their subsequent earnings are removed from the taxable value of your estate and generally protected from creditors and lawsuits. Trusts formed as non-grantor trusts pay their own income tax (unless distributed to a beneficiary); those formed as grantor trusts have the income taxed to the grantor (often the settlor).

Irrevocable Trust Options

Irrevocable trusts offer a variety of options, each with unique attributes that can address your wealth and tax planning, charitable giving and asset protection goals. There are hundreds of types of irrevocable trusts; below are some of the more common options that highlight many of the variations.

Wealth and Tax Planning

Grantor-Retained Annuity Trust (GRAT)

A GRAT offers a tax-efficient way to transfer wealth to beneficiaries, especially if you anticipate having an estate valued at more than the federal estate exemption. A GRAT has a defined term during which you receive an annuity payment on a regular basis, usually a set percentage of the value of the original assets. There is a taxable gift on funding equal to the difference between the value of the assets when funded and the present value of the retained annuity payments (computed using an IRS factor called the 7520 rate). Often, the annuity payments are structured to minimize the gift to a nominal value, such as $1 or $100. At the end of the trust’s term, any remaining assets and the growth on them pass to — or into trust for — your beneficiaries without additional estate, gift or income taxes.

Spousal Lifetime Access Trust (SLAT)

One spouse (donor spouse) creates the SLAT during their lifetime for the benefit of the other spouse (beneficiary spouse) and sometimes others, such as children. As the donor spouse, you can make a gift to the trust using your federal gift and estate tax exemption, and funds may be distributed to your spouse without the remaining trust assets counted in their taxable estate.

Qualified Personal Residence Trust (QPRT)

A QPRT allows you to leverage your federal gift and estate tax exemption now while transferring your primary or secondary home to your beneficiaries. You retain the right to live in your home for a specified number of years and determine who will receive the home when that period ends. At that point, ownership of the home passes to the trust’s beneficiaries, typically your children or a trust for them. You can continue living in the home by entering into a formal written lease and paying fair market value rent. If you live past the term, the value of the home, plus any appreciation during the term of the QPRT, will be outside your taxable estate.

Dynasty Trust

A dynasty trust offers the potential for significant gift, estate and generation-skipping transfer tax savings across multiple generations and possibly protection from creditors. You may contribute an amount up to the current gift tax limit without triggering a gift tax liability. Importantly, the beneficiaries will not have to pay estate or gift taxes on funding or on distributions received (there may be a generation-skipping transfer tax liability if a nonexempt trust distributes to a skip person). You decide how the beneficiaries benefit from the income and principal of the trust. Usually for multigeneration planning, no mandatory distributions are set; instead, distributions are at the discretion of the trustee to help achieve tax and creditor benefits.

Irrevocable Life Insurance Trust (ILIT)

An ILIT, which is an irrevocable trust designed to own life insurance and/or other assets, can reduce estate taxes and protect assets from creditors. Life insurance policy proceeds paid to the trust are usually received income tax free. Further, if the rules are met, the death benefit is not included in anyone’s taxable estate, thereby reducing your estate taxes. You may choose how beneficiaries receive assets and put restrictions in place, such as requiring them to be a certain age to receive any distributions. In some cases, ILITs are structured to serve as a dynasty trust for multiple generations.

Charitable Giving

Charitable trusts allow you to support the causes important to you and your family. They can be structured to meet your specific needs and established during your lifetime or created in your will or other estate planning documents, known as testamentary trusts. Charitable trusts offer several benefits, including income tax deductions, reduced estate taxes and the ability to make a lasting impact. Two of the more common types are charitable remainder trusts (CRTs) and charitable lead trusts (CLTs), along with their variants. Both are split-interest trusts, meaning the benefits are split between a charity and the trust’s noncharitable beneficiaries.

Charitable Remainder Trust (CRT)

A CRT makes initial payments to the noncharitable beneficiary, typically the grantor, over a specified period, and the remaining assets are distributed to one or more designated charities. A CRT’s assets are exempt from income tax on investment earnings and capital gains during the trust’s term. There are two types of CRTs: a charitable remainder annuity trust, which pays a fixed amount each year based on a percentage of the initial funding value, and a charitable remainder unitrust, which pays a variable amount based on a fixed percentage of the trust’s assets each year.

Charitable Lead Trust (CLT)

A CLT makes initial payments to one or more designated charities over a specified period, and the remaining assets are transferred to noncharitable beneficiaries, typically family members. There are two types of CLTs: a charitable lead annuity trust, which pays the charity a fixed amount each year based on a percentage of the initial funding value, and a charitable lead unitrust, which pays the charity a variable amount based on a fixed percentage of the value of the trust’s assets each year.

Asset Protection

Domestic Asset Protection Trust (DAPT)

A DAPT is used to protect an estate and assets from creditors, lawsuits and judgments. The trust is created in a state with asset protection laws. Typically, if you are not a resident of your desired state, you will need a trustee that is. While most irrevocable trusts are protected from the reach of the grantor’s creditors when the grantor is not a beneficiary, the overarching benefit of a DAPT is that it can be self-settled, meaning that the grantor can be a discretionary beneficiary of the trust and still have its assets out of the reach of creditors. Creating the trust in a state with robust DAPT law, such as Delaware or South Dakota, can increase the likelihood that it will be respected for creditor protection purposes. Separately, the particular trust structure will dictate whether the value of the trust assets will be included in your estate for gift and estate tax purposes.

Delaware Incomplete Non-Grantor (DING) Trust

A DING trust is a variation of a Delaware Asset Protection Trust. Similarly, it is created by a non-Delaware resident that names a Delaware trustee. It is administered under Delaware law. The similarities typically end there. A DING trust pays its own income taxes, but recall that Delaware does not have a state income tax. Assets in a DING trust are considered property of the settlor for estate and gift tax purposes. Thus, the trust is used primarily to alleviate state income tax while not incurring a federal gift tax. Individuals might benefit from a DING trust if they live in a high-tax state and are likely to incur significant state capital gains or income tax from ownership or sale of a business, or liquidating a concentrated stock position or low-basis securities.

Choosing the Right Trust

With so many options, it is important to work with knowledgeable professionals to select the right trusts for you and your situation. Glenmede has decades of experience in interpreting and administering trusts to help clients preserve and transfer their wealth.