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OTHER
TRUSTS There
are other kinds of trusts which are very specialized and not often used by
individuals of moderate sized estates such as: a)
Qualified personal residence trust (QPRT)
b)
IRC Section 2503( c ) Trust c)
Charitable Lead Trust d)
Special Trust Devices (GRATs AND GRUTs) a)
Qualified personal residence trust (QPRT)
A primary or vacation home is
transferred to a trust; the grantor retains the right to live there for a number
of years; at the end of the term, the house passes to the beneficiaries.
Benefits: The retained
interest reduces the value of the gift allowing the transfer at reduced taxes.
Concerns: If the
grantor dies during the term, the property is returned to the grantor’s
estate; after the term the grantor may continue to use the property only if the
then owners lease the property under an arm’s length transaction. Tax Advantages:
Reduced estate tax; additional reduction of the estate if rental
payments are required. Process:
The trust and subsequent lease must comply with local law.
The “retained interest” may cause the full value of the asset of be
included in the estate for state inheritance purposes. b)
IRC SECTION 2503(C ) TRUSTS – Trusts
which allow a grantor to made a gift to a minor in trust while utilizing the
$10,000 annual gift tax exclusion. Benefits:
A transfer to a trust gives the donor the opportunity to direct what
will happen with the asset while the minor is underage.
Concerns: Loss of
control over the asset; requirement that the trust must terminate and be paid to
the child upon reaching the age of 21 years.
Tax Advantages:
The transfer of property to a minor can help reduce death taxes by
removing appreciating assets from the estate; depending on the age of the minor,
income taxes may also be reduced. Process:
The trust must be drafted in accordance with federal guidelines;
competent counsel should be obtained. c)
CHARITABLE LEAD TRUSTS - A charitable lead trust
is essentially the reverse of a remainder trust; after income producing property
is transferred to the trust, the charity receives annual payments for a set
term; at the end of the term of the trust, the remaining property passes to
beneficiaries or reverts to the donor. Benefits: It enables the donor to reduce the tax burden of an unusually
high income year. Concerns: The donor is
taxed on the trust income during the term.
Tax Advantages:
A current income tax charitable deduction is available; it can also be
established at death to provide substantial estate tax savings.
Caution: IRS
regulations must be carefully followed; competent counsel should be consulted
along with tax advisors. d)
SPECIAL TRUST DEVICES (GRATs AND GRUTs):
These devices allow a grantor to remove property from his or her taxable
estate at reduced values. With a Grantor Retain Annuity Trust (GRAT), the annual
amount is established at the creation of the Trust (GRAT).
With a Grantor Retained Unitrust (GRUT), the percentage of the Trust is
calculated annually. The grantor
retains the income rights to the assets for a set term.
Benefits:
Reduce estate tax; retention of certain income tax related benefits. Concerns
– Since the trust is irrevocable, the grantor must give up control over the
property. Tax advantages – Income will almost certainly be taxed at lower
rates, if primary residence is used the then current one-time lifetime capital
gains exclusion or roll-over options are available. Competent tax advisors should be consulted before venturing
into these trusts. Ó 2000 James
W. Pearson, Jr., All Rights Reserved FOR ADDITIONAL INFORMATION CALL THE TOLL FREE HELP LINE 1-800-232-1477 E-mail: lawyer@lawwalk.com JAMES
W. PEARSON, JR. Chair of the Federal & State Credit Union Department & Coordinator of legal consultations under the Family Legal Care Plans offered to credit union members. |
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