Why Use a Trust as an Estate Planning Strategy?
Very often, an individual is reluctant to transfer a substantial amount of money to a spouse, young person, or family member out of concern about his or her ability to capably handle their financial affairs, particularly if there is a long-term goal to accumulate savings and funds for the benefit of that person. Trusts are a terrific tool for wealth accumulation in such situations.
Restrictions and other wealth planning strategies are commonly incorporated into a spousal and children’s trust as well as other types of trusts including life insurance trusts to protect children, spouses, immature or disabled adults.
Understanding the Use of a Trust for Your Estate Planning: The Basics
Should You Have a Trust Instead of a Will in New Jersey?
A trust takes effect either during your lifetime (a living trust) or upon your death (a testamentary trust). Testamentary trusts and living (revocable) trusts are always in writing so that the terms of the trust are clearly understood by the creator of the trust, the trustee, and the beneficiary.
Revocable and Irrevocable Trsts: How They Differ
Trusts are characterized as either revocable (meaning capable of being amended or terminated by the creator at any time after the trust is created) or irrevocable (a trust which cannot be revoked by the grantor during his or her lifetime). A revocable trust is flexible if the grantor finds that the trust is not fulfilling the grantor’s estate planning objectives. A revocable trust allows the grantor ease in amending the trust should he/she become dissatisfied with the way the trust is functioning. The assets placed into a revocable trust are included in the gross estate of the grantor and are (potentially) subject to federal and New Jersey estate tax liability and income tax liability. This is an important consideration.
An irrevocable trust has as its primary advantage the reduction of the grantor’s death tax and estate tax liability and protecting assets from creditors. As long as the grantor establishes an irrevocable trust, and retains no incidents of ownership over the trust property and retains no prohibited powers over the assets of the trust that can be considered by law as ownership, then the assets placed into the trust will escape inclusion in the gross estate of the grantor, and the reach of creditors and predators. With an irrevocable trust the assets placed in the trust are considered a complete gift and the property is generally removed from the grantor’s taxable gross estate. Given recent increases in the federal and state gift tax exclusion for all Americans, few individuals will face tax liability when they make a gift to an irrevocable trust. But that could change in 2021 depending upon the Presidential election.
Certain trusts for young persons, called a minor’s trust (a minor is an under age person) can be structured to take advantage of the gift tax annual exclusion. These trusts normally accumulate trust income and principle for the benefit of minors until such time as they reach an age specified in the trust whereupon the trust funds are released to them.
Irrevocable Life Insurance Trusts as an Estate Planning Tool in New Jersey
In appropriate situations, the use of an irrevocable life insurance trust can serve as a powerful (and I mean powerful) New Jersey and Federal tax savings tool. Life insurance proceeds that are kept outside of your taxable estate through proper planning can provide liquidity to estate heirs for a host of purposes.
There are two ways that an irrevocable life insurance trust (ILIT) can be effectively implemented: (1) the trust can be established and then the trustee can purchase the life insurance policy on the insured individual, or (2) an existing in-force life insurance policy can be transferred to the trust. However, in the latter case, the insured must survive the policy’s transfer to the trust by a period of three years or the insurance proceeds will be included in his or her gross estate for estate-tax purposes (IRC Sec. 2035).
Trust law can be a tricky subject. Feel free to contact Fredrick P. Niemann, Esq., an experienced NJ life insurance trust attorney at email@example.com or call him toll-free at (855) 376-5291 for a low cost consultation.
Grantor Trusts as an Estate Planning Tool in New Jersey
An individual can also make tax-advantaged lifetime transfers to a loved one through the use of a grantor trust. Grantor trust rules are complicated but effective in reducing your taxable estate.
A grantor retained annuity trust (GRAT) can be set up to pay the grantor a fixed annuity for a term of years. Thereafter, the remaining trust principal passes to the trust’s beneficiaries tax free.
Then there is a GRIT (grantor retained interest trust (GRIT)) which differs from a GRAT in that, instead of paying a fixed annuity to the trust grantor, the grantor receives all the trust’s annual income. At the end of the trust term, the named beneficiaries receive the remaining trust property tax free.
Charitable Gifts as an Estate Planning Tool in New Jersey
Lifetime gifts to charity provide significant planning opportunities for single and married individual(s) who are charitably inclined and seek both income and estate tax savings. Depending upon individual needs or preference(s), charitable gifts may be made outright or through the use of a trust. Significant income tax benefits can be achieved through use of charitable gifting in NJ.
A charitable remainder trust (CRT) is an option to consider when a person would like to make a significant charitable gift but is not comfortable relinquishing ownership of the gifted property just yet. A CRT can make payments to the donor (you) or some other non-charitable beneficiary (the kids or spouse or friend) for life or for a term of up to 20 years and, when the income terminates, either distribute the trust assets to a designated charity or retain the property in trust for the charity’s use.
By doing this, the donor receives an income tax deduction for the present value of the charitable remainder interest (subject to the tax law’s percentage-of-income restrictions on charitable contribution deductions). Subsequent distributions to the donor or other non-charitable income beneficiary are taxed under the rules of IRC Sec. 664(b).
Which Type of Trust is the Best Trust for You?
Which Particular Type of Trust Is Appropriate For You?
Unfortunately, the answer is an unsatisfying… “it depends”. With the great number of trusts that are available, it is sometimes difficult to determine which trust is the most appropriate for you. After carefully analyzing your objectives, a qualified New Jersey trust attorney will consider which one or more type(s) of trusts are appropriate in light of your estate planning goals such as dollar size of your gross estate, the financial, legal, and mental competency of beneficiaries, the amount of income needed for your current living needs and for retirement purposes.
After analyzing all relevant client data, the following guidelines can be used to decide which form of trust may be the most appropriate for you.
- If you want to avoid estate tax liability in NJ on real estate property while also removing future appreciation on the value of this property, then an irrevocable trust is appropriate since it removes the property from your estate provided, of course, you retain no incidents of ownership or control over the property.
- If you want to retain some degree of flexibility and control over your property, or you want the right to alter, amend or vary the terms of the trust after it has been established, then a revocable living trust may be the most appropriate.
- If you want to avoid income tax liability on the value of the income produced by the trust, then you may want to use a trust that is not in violation of the grantor trust rules (e.g., an irrevocable trust that does not distribute its income to you).
- If you want to avoid gift tax liability on the value of income or corpus, then some form of trust will be required that results in little or no gift tax liability. A revocable living trust avoids gift tax liability because there is no completed gift, but the value of the trust assets will be included in the grantor’s gross estate.
- If you want to retain some degree of control over your assets after you die, yet also wish to provide a stream of income to your surviving spouse, then either a nonmarital trust or Q-TIP trust will be appropriate, especially since both trusts allow you to determine who the ultimate beneficiaries of the property will be. In addition, both trusts enable you to provide a stream of income to your surviving spouse and children. The distinction between the use of the nonmarital trust as opposed to the use of the Q-TIP trust is designed to achieve maximum use of the unlimited marital deduction. If both the unified credit and the marital deductions are used, or if the decedent intends to use both as part of an overall estate plan, then both trusts may be appropriate.
- If you want to provide your spouse with little or no income produced from a trust, but want your surviving spouse to have control over the corpus of the trust and all undistributed income after her death, then the estate trust may be the most appropriate choice of a trust since the surviving spouse seldom obtains any lifetime income yet has control over the corpus and income upon her death.
- If you have a reasonably sized estate and wish to provide a stream of income to your spouse and children, yet leave the remainder of the estate to grandchildren, then a generation-skipping trust may be the most appropriate trust arrangement in terms of accomplishing these objectives.
- If you want to give your surviving spouse the option of receiving assets from your estate yet not have to pay death taxes on this trust upon his/her death, then a “disclaimer trust” may be the most appropriate trust technique, since it allows a surviving spouse to receive a stream of income and/or corpus from the disclaimed property held in trust while alive, yet it avoids inclusion of trust property in the surviving spouse’s gross estate (similar to a nonmarital trust) upon his/her death.
The Use of an Irrevocable Income Only Trust in Elder Law and Asset Protection Planning
A single individual or a married couple who has a taxable estate needs to look beyond traditional estate planning solutions. The use of various gifting techniques and trusts can help a client accomplish income tax and estate tax savings, while minimizing exposure to transfer taxes.
If you should have additional questions about which type of trust is best for you, then please contact Fredrick P. Niemann, Esq.
at firstname.lastname@example.org or call him
toll-free at (855) 376-5291. He genuinely welcomes you and your call.
Fredrick P. Niemann, Esq. NJ Trust Attorney
Written by Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a New Jersey Trust Attorney
My Mom just raves about Mr. Niemann. When she leaves his office, she is calm and totally confident in his counsel, wisdom and advice.
Our family is blessed with him being my Mom’s protector and confidant.
—Teresa Vincitore, West Paterson, NJ
New Jersey Trust attorney serving these New Jersey Counties:
Monmouth County, Ocean County, Essex County, Cape May County, Mercer County, Middlesex County,
Bergen County, Morris County, Burlington County, Union County, Somerset County, Hudson County, Passaic County