Personal Trusts

Trusts can be revocable or irrevocable, the former being changeable by the grantor during the grantor’s lifetime and becoming irrevocable at the grantor’s death. Revocable trusts set the stage for the disposition of assets similar to a will, however, they generally avoid probate administration and the costs associated with it. Make sure that assets are titled into the name of the revocable trust after it is established.

An irrevocable trust is generally not readily changeable and is used for specific purposes in estate and financial planning. Assets placed in an irrevocable trust are generally transferred outside of the grantor’s estate for estate and transfer tax purposes.

An example is an Irrevocable Life Insurance Trust (ILIT) that is used to hold life insurance and collect proceeds outside of the client’s estate. Asset Protection Trusts (APTs) are also irrevocable trusts, however, the assets held in them are all considered held in the grantor’s estate and are taxed upon the grantor’s demise.

Clients with a net worth high enough to be subject to the estate tax will often have substantial illiquid assets as part of their overall investment portfolio. Accessing the value of these types of assets for liquidity to pay estate taxes (due within nine months of death) often results in accepting prices that are forced lower by this time constraint.

To avoid this fire sale situation, clients often choose to liquidate more of their investment assets to cover estate taxes. They sell marketable securities and take withdrawals from investment and brokerage accounts.

The use of a properly structured and administered Irrevocable Life Insurance Trust (ILIT) and the life insurance it holds can provide the liquidity necessary to cover estate taxes. This avoids or limits the sale of other investment assets.

ILITs can help accomplish other planning goals as well. When a client does not have a taxable estate, life insurance inside an ILIT can help leverage the amount of money that passes to the client’s heirs. Since the death benefit will be received inside an ILIT, the client can dictate through the terms of the trust just how the insurance proceeds are to be used and allocated to the beneficiaries. If drafted properly, the trust may protect the insurance proceeds from the beneficiaries’ creditors, including potential divorcing spouses. If dynasty provisions are included, the trust can prevent future depletion of trust assets by eliminating estate taxes paid by future generations on the assets held in the trust, for as long as state law permits.

Discussing estate planning and life insurance with clients can help financial professionals retain assets by minimizing loss due to estate taxes and potential creditor claims of heirs. Using Premier Trust as independent trustee to administer trusts mitigates the chance for potential poaching of client assets by banks or trust companies. Financial Professionals become a valuable resource to help clients accomplish long-term goals.

Nevada Special Needs Trust (SNT) are irrevocable trusts created to ensure that a physically or mentally disabled beneficiary can enjoy the use of property held in trust for his or her benefit.

A SNT may be established for a beneficiary to prevent a beneficiary from losing access to essential government benefits including: Social Security Disability Insurance (SSDI or SSD), Supplemental Security Income (SSI) and federal and state sponsored Medicaid programs that provide the beneficiary access to healthcare, long-term care and nursing home care.

SNTs are frequently established for the benefit of a disabled person to receive an inheritance, personal injury settlement proceeds, or the proceeds of compensation for criminal injuries, litigation or insurance settlements. Often they are set up under the guidance of a Structured Settlement planner in cooperation with a qualified legal and financial team.

When established by a Court, family members, a trust company, individuals or entities may be appointed to administer the trust as its trustee.

An independent trust company is often the preferred recommendation since it can act more efficiently to secure government benefits than a court appointed official or an individual that does not have the expertise.

The disabled person, a parent, grandparent, legal guardian or court, can establish a Self-Settled SNT for the sole benefit of a disabled person under the age of 65. Under current Social Security Law, the trust assets are not counted as assets available to the beneficiary for benefits qualification purposes. However, the trust must include “Payback” provisions for Medicaid upon the death of the beneficiary, if the beneficiary had the right to outright possession of the assets.

Pooled trusts, in which several individual beneficiaries are “Pooled” together, can be managed only by authorized non-profit organizations. At the death of a beneficiary “Payback” is modified to allow the remaining funds held in trust to be available to the other pooled beneficiaries.

Third-Party SNTs, that are established by anyone other than the disabled beneficiary (or someone acting on behalf of the beneficiary), are not restricted as to age of the beneficiary and do not need to include Medicaid “payback” provisions.

SNTs are complicated instruments that are affected by many different competing laws, rules and regulations. Great care must be taken in the choice of appropriate trustees to administer trust assets for a disabled person and to the specific provisions that should be included in the trust. Competent professionals specializing in this very unique aspect of the law should be engaged to draft the appropriate documents.

A Dynasty Trust is an irrevocable trust that contains “dynasty” provisions within it that instruct the trustee to hold the assets placed in the trust for more than one generation. The duration or life of the trust depends on the laws of the state under which it is governed, commonly referred to as the “rule against perpetuities.”

If the assets transferred to the trust are exempt from Generation Skipping Transfer tax (GST tax), then the assets held in the trust may inure to the benefit of future generations without further estate or transfer taxes.

Dynasty provisions can be included in any trust; revocable trusts, irrevocable life insurance trusts (ILITs), asset protection trusts, credit-shelter trusts, and even trusts established by a will (testamentary trusts).

The benefits of holding assets in trust for high net worth clients is obvious; trust assets grow and compound within the trust free of estate taxes that normally would be levied at the death of each generation.This is how real family wealth has been and is created, for example, the Rockefellers and the Carnegies.

Under reasonable growth and income tax assumptions, $1 million left in a typical one-generation trust for 115 years (within the time periods permitted in most states) would grow to about $67 million. The same $1 million in a Dynasty Trust would grow to almost $220 million, about 3.2 times more due to the estate tax savings and compounding growth. There are several states that permit perpetual trusts and in Nevada a dynasty trust can last 365 years. Compounding effects longer than 115 years are more staggering.

Dynasty trusts are not only for the wealthy. As is common with irrevocable trusts that have been established by someone other than the beneficiary, the assets held in the trust are exempt from creditor claims of the beneficiary. That includes divorcing spouses. Today more than half of all marriages end in divorce.

By incorporating “Dynasty” provisions into their planning vehicles, clients of even modest wealth can protect their children, grandchildren and even great grandchildren and further from the loss of assets to a divorcing spouse.

Charitable trusts are irrevocable trusts that include both taxable and non-taxable beneficiaries. They are popular vehicles that can be structured to provide the donor with flexible planning options.

There are two basic types of Nevada charitable trusts; charitable remainder trusts and charitable lead trusts. In both instances, the donor can contribute highly appreciated assets to fund the trust, avoid the capital gains tax on the sale of the assets, and receive an income tax deduction for a portion of the amount donated in the year of funding.

Charitable Remainder Trusts (CRTs):
CRTs provide a stated percentage of trust income to the donor during the donor’s lifetime. Upon the donor’s death the assets that are left, known as the “remainder,” are distributed to the charitable beneficiary. There are two main subsets of CRTs:

Charitable Remainder Annuity Trusts – CRAT:
Pays the donor annually, a fixed dollar amount determined when the trust is established.

Charitable Remainder UniTrusts – CRUT:
Pays the donor annually, a fixed percentage of trust’s value computed at the start of each year.

A popular variation of the CRUT provides for distribution of a set percentage of Net Income With Right of Make-up, known as a NIMCRUT. It is very flexible since income can be deferred for years and then paid out as needed, similar to a retirement plan but without the IRS restrictions.

Charitable Lead Trusts (CLTs):
CLTs provide distribution of a portion of the trust’s income to the charitable beneficiary for a specified period of years or designated lifetime after which the balance is distributed to non-charitable beneficiaries, either back to the donor or to the donor’s heirs. They can be setup to provide an Annuity or UniTrust payment, similar to CRTs. CLTs are useful planning tools for donors who are not concerned with receiving current income from donated assets and are more interested in removing assets from their taxable estate.