Trusts

Testamentary trusts are trusts established upon a person’s death through his/her will. It comes into effect only upon the death of the grantor.

With certain narrow exceptions, these trusts cannot be changed and the settlor cannot reclaim the trust property. In some cases, assets placed in an irrevocable trust are removed from the settlor’s estate.

Life insurance trusts are created to provide a plan of disposition for the proceeds of life insurance policies. The trust is designated as the owner of the policy. The trust enables the proceeds of life insurance to avoid federal estate tax. The transfer of the policy to the trust and funds to make premium payments may qualify for the annual exclusion for gift tax purposes.

These are trusts established during the life of the settlor. The settlor has the right to terminate the trust and reclaim the assets. Upon the death of the settlor, the trust becomes irrevocable.

Marital deduction trusts are trusts in which transfers of property between married partners are free of federal estate tax upon the death of the first spouse. The surviving spouse must be the sole beneficiary of the trust during his/her lifetime, and must be given (1) either an unrestricted power to designate the beneficiaries of the trust assets when he/she dies (this kind of trust is also called a Power of Appointment Trust), or (2) a qualified terminable interest in the trust (see QTIP Trusts, below).

These trusts are a flexible type of marital deduction trust in which the surviving spouse receives all of the income earned by the trust during his/her lifetime and can be the beneficiary of discretionary distributions of principal. The first spouse to die determines the ultimate distribution of the trust assets remaining at the death of the second spouse. The full value of the property in the trust will be subject to federal estate tax upon the death of the second spouse to die. This trust is often used in second marriages.

These trusts are irrevocable trusts designed to make full use of the applicable federal estate and gift tax credit amount at the death of the first spouse to die and thereby minimize federal estate taxes due upon the death of the second spouse to die. Bypass trusts hold the portion of the estate of the first spouse to die that is exempt from federal estate and gift tax and thereby “bypass” the estate of the surviving spouse. Bypass trusts can be used to provide income to the surviving spouse and/or other family members during the surviving spouse’s lifetime.

These trusts are irrevocable and are designed to hold assets for many generations in order to take maximum advantage of the opportunity to defer estate taxes and avoid the claims of creditors and disaffected spouses. They are drafted to encourage the trustees of the trust to keep the assets in trust for the benefit of the beneficiaries and to allow the beneficiaries to “use” the trust property rather than receive it outright.

Gift trusts are used to make gifts to minors during the grantor’s lifetime.

Section 2503(b) trusts do not require termination or access by the donee at the age of 21, and the principal can continue to be held in the trust as long as the grantors specify. Any gift made to the trust by a single donor whose value does not exceed the gift tax annual exclusion amount ($14,000 in 2015) is considered a present interest gift and will qualify for the gift tax annual exclusion. Section 2503(b) trusts require that the trust income must be distributed annually. The trustee may be given the discretion to make distributions of principal while the donee is a minor.

Section 2503(c) Trusts, also called “minor’s trusts,” also meet the legal requirements that permit gifts to minors in trust to qualify as gifts of a present interest and thereby qualify for the gift tax annual exclusion.

Section 2503(b) Trusts allow all of the principal and income to be used for the minor at the discretion of the trustee, and must terminate or grant the beneficiary the right to withdraw assets at age 21.

Grantor trusts are trusts over which the grantor has retained so much control, or in which the grantor has retained so great an interest, that the trust is disregarded for income tax purposes and all income and deductions associated with the trust are taxed directly to the grantor.

These are grantor trusts whose income taxed to the grantor so that the benefit of the trust income passes to the beneficiaries unreduced by income taxes.

These irrevocable trusts permit affluent families to avoid federal estate tax by holding assets such as a personal residence (QPRT), closely held business interests, or other assets that generate income and have the potential to appreciate substantially. The trust lasts for a period of years, at the end of which the assets pass to the beneficiaries or to another trust for their benefit.

Charitable trusts are trusts that are established for a recognized charitable purpose, including relief of poverty, advancement of education advancement of religion, promotion of health, advancement of a governmental purpose, or promotion of some other purpose beneficial to the community. They are recognized by the IRS as tax exempt and (subject to limitations) are eligible to receive tax deductible contributions.

These trusts, also called Supplemental Needs Trusts, provide benefits to a disabled beneficiary without disrupting the beneficiary’s eligibility to receive assistance from government needs-based programs. The assets placed in these trusts are typically used to pay for comforts, education, counseling, or recreation that are not covered by public assistance.

Changes permitted by state law to revocable and certain irrevocable trusts.

When the Will or trust document does not contain provisions allowing for the appointment, removal or discharge of executors and trustees, it is necessary for the beneficiaries to file a petition in the local Orphans’ Court to request that this action be permitted.