Source: https://www.probizservices.com/types-of-trusts/
Timestamp: 2020-01-29 03:44:53
Document Index: 747147058

Matched Legal Cases: ['§ 2503', '§ 2503', '§ 2503', '§ 1361', '§ 1361', '§ 642', '§ 645', '§ 1361', '§ 1361', '§ 1']

50 Types of Trusts | Pro Biz Services
Trusts can be established for a wide variety of purposes, and some types of trusts have more than one name. This issue provides brief descriptions of 50 trusts. The use of trusts has increased during the last 30 years as taxpayers attempt to nurture and preserve financial wealth for their spouses, children, and grandchildren. The following list illustrates the variety of trusts and helps practitioners understand the names that are used to label the various trusts.
A-B trusts. Before the adoption of the unlimited marital deduction, when the marital deduction was limited to 50% of an individual’s adjusted gross estate, it was common to create two trusts for the benefit of an individual’s spouse—one that qualified for the marital deduction and one that did not. These were frequently referred to as A-B trusts. Many practitioners use this term today in reverse with the intent first to trap the estate exemption amount and then, with trust B, to capture the marital deduction.
Alaska trust. This trust, available in certain states, combines the benefits of multigenerational planning [see generation-skipping trust and dynasty trust (items 22 and 16 in this list)] with an attempt at protection from the grantor’s creditors. It has risks that must be carefully considered. Alaska trusts can also last into perpetuity and pay no state taxes. They also are intended to compete with many of the offshore trust havens.
Applicable credit amount trust. This is another name for a credit shelter trust (item 9 in this list).
Blind trust. This is a trust, often created by a politician after election to office, in which certain assets of the grantor are managed by one or more trustees without the grantor being advised of the property held in the trust. The assets are, however, managed for the benefit of the grantor.
Bypass trust. This is another name for a credit shelter trust (item 9 in this list).
Cemetery trust. This is a trust created for the purpose of maintaining one or more graves or gravesites in a cemetery.
Charitable lead trust. This is a trust that provides a specified payment to a charity at least annually for a specified period, with the remainder passing to one or more individuals. The payment is expressed as a fixed percentage of the value of the trust at inception (in effect, an annuity) or a fixed percentage of the value of the net assets of the trust, calculated annually. If an annuity is utilized, it is a charitable lead annuity trust (CLAT); if a percentage of the net assets valued annually is utilized, the trust is a charitable lead unitrust (CLUT). These trusts may reduce estate, gift, and income taxes through charitable contribution deductions.
Charitable remainder trust. This is a trust that provides payments at least annually to one or more individuals, with the payments equal either to a fixed percentage of the assets valued at the trust’s inception (in effect, an annuity) or a fixed percentage of the net assets of the trust valued annually, for either a set number of years or for one or more lifetimes. If an annuity is utilized, the trust is a charitable remainder annuity trust (CRAT); if a percentage of net assets valued annually is utilized, the trust is a charitable remainder unitrust (CRUT). These trusts may reduce estate, gift, and income taxes from capital gains.
Credit shelter trust. This trust is customarily designed to receive the maximum amount of assets that can pass free of federal estate tax upon the death of the first spouse. It has numerous variations. Frequently, the terms of the trust provide that all of its income will be provided to the surviving spouse for life, with the assets passing to others upon the surviving spouse’s death. Another variation involves a sprinkling trust (see item 46 in this list).
Contingent trust. This trust comes into being only in the event that a contingency occurs. For example, a document may provide that if any assets are distributable to a person under the age of 21 years, those assets are held in a contingent trust for the benefit of that person until he or she attains 21 years of age.
Crummey trust. This trust permits beneficiaries to withdraw a limited amount of assets contributed to the trust during a specified period (often 30 days) after the date of the contribution [Crummey v. Commissioner, 397 F.2d 82 (9th Cir. 1968)]. Its purpose is to avoid gift taxes on the transfers by qualifying the transfers for the annual gift tax exclusion ($13,000 in 2012). Insurance trusts (see item 27) are often designed as Crummey trusts to allow the grantor to contribute the amount of the annual premium for the insurance policy without gift tax consequences.
Delaware business trust. More similar to a family limited partnership (FLP) or limited liability company (LLC) than to a traditional trust, a Delaware business trust is a way to hold and invest assets, possibly including life insurance, with greater flexibility than most trusts allow. The grantor of the trust retains far more control than the tax laws permit for traditional trusts. These trusts can provide limited liability, creditor protection, and valuation discounts.
Disclaimer trust. This trust is designed to receive property that is disclaimed (renounced) by a beneficiary. For example, it can be used to fund a credit shelter trust (see item 9), so that the surviving spouse can determine how much goes into the credit shelter trust after the first spouse’s death.
Discretionary trust. This is any trust in which the trustees have discretion to distribute (or not distribute) income or principal to one or more beneficiaries. The discretion may apply to income, principal, or both. The trustees may have the right to give or not give income or principal to a single beneficiary, or to distribute some or all of the income or principal among some members of a group while excluding one or more members of a group.
Dry trust. A dry trust has no assets. It is usually created either to receive assets upon the death of an individual, such as a pour over (see item 35) under the individual’s will, or to receive assets transferred to the trust via a power of attorney in the event of an individual’s incapacity.
Dynasty trust. This is a name customarily used for a generation-skipping trust (see item 22) that continues for an extended period of time, such as for multiple generations, limited only by the applicable state rule against perpetuities, if any. In certain states, a dynasty trust may run for a very extended period of time. Its purpose is to avoid estate taxation for several generations and to provide for an individual’s descendants (or the equivalent) for a very long period.
Educational trust [I.R.C. § 2503(c) trust]. This is a trust for a minor (a person under the age of 18 or 21 years, depending on state law) designed to use the annual gift tax exclusion for gifts on behalf of the minor. I.R.C. § 2503(c) trusts are an alternative to the use of the Uniform Gifts (or Transfers) to Minors Act and are often a better way of planning with respect to gifts to children whose parents are in a high-income tax bracket, particularly if the children’s income is subject to the kiddie tax. An I.R.C. § 2503(c) trust can include provisions that allow more flexibility than is available under the Uniform Gifts (or Transfers) to Minors Act. Variations of this trust permit it to continue beyond the date on which the beneficiary attains age 21.
Electing small business trust. An EBST can be a shareholder in an S corporation [I.R.C. § 1361(c)(2)(A)(v)]. A trust can elect to be an ESBT if all five of the following criteria are met [I.R.C. § 1361(e)]:
All of the trust’s beneficiaries are individuals, estates, and certain organizations that are eligible to receive deductible charitable contributions under I.R.C. 170(c).
No interest in the trust was acquired by purchase.
It is not a qualified Subchapter S trust (see item 41).
It is not exempt from federal income tax.
It is not a charitable remainder annuity trust or charitable remainder unitrust (see item 8 in this list).
Estate trust. This type of marital deduction trust (see item 32) provides that when the surviving spouse dies, the assets in the trust—or at least the accumulated income of the trust— will be paid to that spouse’s estate.
Foreign situs trust (offshore trust). An individual who believes that assets cannot be fully secure while they remain under the jurisdiction of U.S. courts will seek havens outside U.S. boundaries (such as in Switzerland, Liechtenstein, and the Isle of Man) where the assets may be safe from creditors. This does not necessarily mean that assets can be hidden. There is a high degree of economic intelligence data and disclosure to the IRS when offshore trusts are formed or assets are transferred to the trusts.
Funeral trust. A funeral trust is a pre-need trust established through a contract with a person engaged in the trade or business of providing funeral or burial services. The purchaser of pre-need funeral services is the grantor and owner of the trust, but the trustees can elect to file the tax returns and pay the tax for qualified funeral trusts.
Generation-skipping trust. A GST either skips over an entire generation or provides for members of more than one generation, and it is normally geared to use the exemption from the tax on generation-skipping transfers.
Grantor retained annuity trust. A GRAT is an irrevocable trust created by an individual (the grantor) that provides the grantor, at least annually, a payment equal to a fixed percentage of the value of the assets placed in the trust (in effect, an annuity) for a fixed period of time, or until the grantor’s death. Upon termination, the balance in the trust usually passes to the grantor’s estate if the grantor does not survive the term of the trust, or to other individuals if the grantor survives the term of the trust. Its purpose is to reduce gift and estate taxes, but it serves little, if any, tax purpose if the grantor dies during the term of the trust. There is no step-up in basis of the assets in the trust if the trust terminates during the grantor’s lifetime, and it is possible for the gift tax and resulting capital gain tax (assuming the assets are sold) to exceed the tax savings resulting from the creation of the trust. For income tax purposes, a GRAT is a grantor trust (see item 26).
Grantor retained income trust. A GRIT is now used only in limited situations. It is an irrevocable trust in which the grantor retains the right to income for a fixed period of years geared to end before the grantor’s death. Upon termination of the trust, the assets in the trust pass to the final beneficiary. The main purpose of a GRIT is to reduce the gift tax value of the transfer, because the value of a promise to transfer an asset in the future is less than the asset’s current value. GRITs are now used mostly for gifts to non immediate family members, such as nieces or nephews. A GRIT serves little or no tax purpose if the grantor dies before it terminates.
Grantor retained unitrust. A GRUT is very similar to a GRAT (item 23), except that instead of a fixed payment that is a percentage of the assets of the trust valued at the creation of the trust, the grantor is to receive an annual (or more frequent) payment equal to a fixed percentage of the value of the net assets of the trust, valued annually during the term of the trust.
Grantor trust. A grantor trust is any trust in which the grantor retains enough control to cause the income and capital gains to be taxed to the grantor, even if they are not payable to the grantor.
Insurance trust. This is generally an irrevocable trust designed to own insurance on the life or lives of one or more individuals and to provide for the disposition of the proceeds of such insurance. Unless irrevocable, an insurance trust serves no tax purpose.
Intentionally defective grantor trust. A trust in which the grantor retains rights that make it a grantor trust for income tax purposes (defective) but an irrevocable trust (see item 30) for estate and gift tax purposes. It may result in increased tax savings.
IRA-QTIP trust. This is a type of qualified terminable interest property (QTIP) trust (see item 42) that is specifically designed to receive the proceeds of an individual retirement account (IRA). Specific provisions must be included in the IRA agreement and in the trust for an IRA-QTIP trust to qualify for the estate tax marital deduction and avoid adverse income tax consequences.
Living trust. This is any trust created during the lifetime of the person creating the trust. It is also called an inter vivos trust.
Marital deduction trust. This is any trust that qualifies for the grantor’s estate tax (or gift tax) marital deduction. A marital deduction trust may provide, for example, that the grantor’s spouse will receive all of the trust’s net income for life, with the assets remaining in the trust passing to other individuals upon the spouse’s death. It may also provide that the net income is payable to the spouse for life but give the spouse the right, either by will or by another specified instrument, to determine who receives the assets remaining in the trust upon that spouse’s death.
Medicaid trust. This is typically a living trust for the benefit of the grantor or the grantor’s spouse. Its purpose is to protect assets from creditors and to permit eligibility for Medicaid benefits. See also supplemental needs trust (item 47 in this list).
Minority trust. This is a trust geared to hold assets during an individual’s minority or an age specified in the trust.
Pour-over trust. This trust is funded from another instrument; for example, a person’s will may instruct the executor to transfer (pour over) all or a portion of the assets of the estate to a trust created under another instrument.
Power of appointment trust. This is a trust over which an individual has a power of appointment—the right to designate who will receive some or all of the assets of the trust at a specified time or times. A power of appointment may be exercisable either during life (an inter vivos power) or by will (a testamentary power).
Qualified disability trust. A QDT for income tax purposes is a trust that is a disability trust for purposes of the social security benefit rules, but only if all beneficiaries of the trust as of the close of the tax year were disabled for social security purposes for some portion of that year. The beneficiaries must be under age 65. A QDT is allowed to claim an exemption deduction equal to the amount of an individual’s exemption deduction rather than the much smaller amount usually allowed to a trust [I.R.C. § 642(b)(2)(C)(i)].
Qualified domestic trust. A QDOT is very similar to a QTIP trust (item 42 in this list), but it is meant for a surviving spouse who is not a citizen of the United States. A QDOT must have specific provisions regarding the distribution of income and principal and who may be a trustee. Unless an appropriate bank or trust company is a trustee, the trust must have provisions for securing future taxes. QDOTs are subject to special tax rules applicable only to such trusts.
Qualified personal residence trust. A QPRT is a variation of a grantor retained annuity trust (item 23). A QPRT is funded with the grantor’s residence or vacation home. It provides that the grantor may reside in the residence (or in another purchased with the proceeds of the sale of the residence) for a specified number of years, at the end of which the property passes to other persons. Its purpose is to reduce the value of the property for transfer tax purposes.
Qualified revocable trust. A QRT is any trust that on the day an individual died was treated as owned by the decedent because the decedent held the power to revoke the trust. A QRT may make an I.R.C. § 645 election to be treated as part of the decedent’s estate for a limited period of time that is generally 2 years after the date of death, so that the QRT does not have a separate IRS filing requirement during that period. The trustee makes the election by filing Form 8855, Election To Treat a Qualified Revocable Trust as Part of an Estate.
Qualified Subchapter S trust. A QSST can be an S corporation shareholder. A trust is eligible to be a QSST only if five conditions are met [I.R.C. § 1361(d)(3)]:
All of the trust’s income is distributed (or required to be distributed) currently to one individual who is a citizen or resident of the United States.
During the current income beneficiary’s life, the trust cannot have any other income beneficiary.
Any corpus distributed during the current income beneficiary’s life may be distributed only to that beneficiary. 15
The current income beneficiary’s interest will not terminate until the beneficiary dies, unless the trust terminates earlier.
If the trust terminates during the current income beneficiary’s life, the trust will distribute all of its assets to the beneficiary.
A QSST can be a substantially separate and independent share of a trust.
Qualified terminable interest property trust. A QTIP trust is one of several types of trusts designed to qualify for the estate or gift tax marital deduction (see marital deduction trust, item 32). A QTIP trust provides that the grantor’s spouse will receive all of the net income for life, and it can (but need not) allow invasion of principal for the spouse’s benefit. When the spouse dies, the trust assets are includable in that spouse’s estate for estate tax purposes and are distributed in accordance with the provisions of the trust.
Rabbi trust. This is not a typical trust arrangement; instead, it is a nonqualified retirement plan or deferred compensation arrangement. The first was created for a rabbi (thus its name).
Revocable living trust. This is a trust created during the grantor’s life that may be revoked by the grantor. It is used for such purposes as avoiding probate, providing asset management during the grantor’s lifetime, and permitting the administration without ancillary (additional) probate proceedings of assets such as real estate located in a jurisdiction other than the one in which the grantor resides. These trusts have the same income, gift, and estate tax consequences as wills, and they may or may not reduce estate administration expenses and legal and accounting fees. Revocable living trusts must be executed in accordance with applicable state law.
Second-to-die insurance trust. This is a type of insurance trust (item 27) geared to one or more second-to-die insurance policies. It is also called a survivorship or last-to-die trust.
Spray or sprinkling trust. This is a discretionary trust (item 14 in this list) created for the benefit of a specified group, such as the grantor’s spouse and descendants.
Supplemental needs trust. These trusts, formed for the benefit of an incapacitated person, were specifically authorized by Congress in 1993. A supplemental needs trust typically provides that the assets are available to be used for the benefit of the disabled person, but the trustees are not to use trust assets to the extent the individual would otherwise receive governmental benefits. For example, a parent might create a trust to provide additional funds to care for an incapacitated child without interfering with the child’s Medicaid benefits. Supplemental needs trusts often deal with a beneficiary’s nonessentials, such as paying for a vacation or a television. When the disabled beneficiary dies, the state has generally has a first lien on the residue of the trust to repay some of the Medicaid assistance. A supplemental needs trust can be a QDT (item 37).
Unified credit trust. This is another name for a credit shelter trust (item 9 in this list).
Voting trust. A voting trust can be a shareholder in an S corporation [I.R.C. § 1361(c) (2)(A)(iv)]. A voting trust is created primarily to exercise the voting power of the S corporation stock transferred to it. The beneficial owners must be treated as the owners of their respective portions of the trust, and the trust must be created pursuant to a written trust agreement signed by the shareholders that includes the following four provisions [Treas. Reg. § 1.1361-1(h)(1)(v)]:
It delegates the right to vote to one or more trustees.
It requires all distributions with respect to the stock to be paid to, or on behalf of, the beneficial owners of the stock.
It requires title and possession of the stock to be delivered to the beneficial owners when the trust terminates.
It will terminate on or before a specific date or event, either by its terms or by state law.
Wealth replacement trust. This trust holds insurance on the life of an individual, or on the lives of an individual and his or her spouse. The insurance proceeds then replace assets that pass to charity, such as upon the termination of a charitable remainder trust.
401(K) trust. This trust holds the assets of a business’s retirement plan. In recent years this arrangement has been expanded to include single employee businesses and plans that are “self directed” by the plans trustee. Careful creation and use of this trust can allow persons access to their existing retirement funds without paying income tax or early withdrawal penalties to be used in their business or in real estate investing.
Naked Trust. This is a trust without a trust document and is allowed in Ohio. This is possible because assets of any trust are not titled in the name of the trust. Rather, assets are titled in the name of the trustee.
Land Trust. This trust is used to create “anonymous” owners of record for real estate. They can also be used to transfer real estate into an entity (usually an LLC) without invoking the “due on sale” clause by transferring property into the trust (using the trustee’s name) that has the desired entity as the beneficial owner. Also, there is an expectation that multiple properties owned by one individual or entity can protect itself from “spill over liability” if each property is held within a unique land trust for each property. Unlike entities, there is no special filing for trusts and so the trust document can be used to create unique land trusts again and again.
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