Trusts are valuable tools which provide a great deal of flexibility in controlling your family legacy. Since complex rules often govern how trusts are established and managed, having your attorney and CPA involved in structure and drafting is imperative.
Your relationship officer at Pacific Portfolio’s Trust Company can walk you through their many uses and types, but here are some of the more common ones.
As implied, these trusts are established during your lifetime. You “fund” them by transferring ownership of your assets to the trust, although you retain control and can change or dissolve the trust if your needs change. Some establish living trusts to simplify their lives by putting all of their investments in one place, and having their Trustee account for all investment activity. Rather than relying on a durable power of attorney to manage your affairs should you become incapacitated, which some brokerage firms and banks will not honor, your Trustee is empowered to step in and handle your investments and finances without court intervention. This can be particularly helpful if you do not have a spouse, or your spouse is not familiar with your financial affairs and investment program. If all of your assets are in a living trust, your estate will avoid probate, which provides some additional privacy for your family.
Also referred to as a By Pass Trust, this type of trust is usually created by language in your will, a so called “testamentary trust,” that comes into being upon the death of the first spouse to die. It allows the transfer of assets in the amount of the allowable federal exemption to be transferred to heirs without any estate tax. The trust is generally structured to pay income to the surviving spouse during his or her nlifetime, and can also make special distributions for health, support and maintenance. When the second spouse dies, all of the assets in the trust are paid to your beneficiaries without estate taxes.
Our trust company is qualified to act as the Trustee of your IRA rollover, and will work with your attorney to structure customized distribution options
which can be very valuable as you structure your estate plan, to maximize the benefit of both your IRA and your plan.
Grantor Retained Annuity Trust (GRAT)
This is a vehicle providing an effective means for transferring appreciating property to children at reduced “gift tax” costs. It is similar in concept to a QPRT (mentioned below); however it can be funded with other appreciating assets such as marketable securities. The assets are transferred into trust and the grantor retains an income annuity stream for the trust term. The value of the gift is discounted for the annuity payments retained by the grantor,which means the exemption credit used to make the gift is reduced. At the end ofthe trust term, the children receive the appreciated property remaining in the trustat the end of the term free of estate and gift taxes. The transfer amount is maximized when the trust is funded with rapidly appreciating assets.
These trusts, which can be structured in a variety of ways can help save taxes, support your favorite charity, and provide income to your family members. In Charitable Lead Trust, a charity of your choosing gets a distribution of income from the trust each year for a set number of years, after which you oryour beneficiary receives the remaining assets in the trust. When structured for your beneficiaries to receive trust assets, this can be a very powerful wealth transfer tool, especially in a low interest rate environment. In a Charitable Remainder Trust, you or your beneficiary receive an income for life or a set number of years, and then the remainder distributes to a charity. By funding these irrevocable trusts with your low tax basis investment, you can avoid paying capital gains tax on the property transferred, and get a charitable deduction for a portion of the assets contributed to the trust. The income distributions for either trust can be based on a set amount, like an annuity, or upon a percentage of the total value of the assets held in trust at the end of each year. The IRS dictates how your “gift” is calculated for estate tax deduction purposes. These charitable trusts can provide income and estate tax savings, particularly in a high interest rate environment.