Why Use a Trust as an Estate Planning Strategy?
Many times individuals are reluctant to transfer money to a spouse, young person or family member because of concern(s) about the person’s ability to capably handle his or her financial affairs. The goal of the person making the gift has a long-term goal to accumulate savings for the benefit of his or her loved ones.
As a result, protective restrictions and other wealth planning strategies are incorporated into a spousal and/or children’s trust. Other types of trusts including life insurance trusts are also used to protect children, spouses, and 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 is generally created by a person during his or her lifetime, but it can be written to take effect upon death. This trust is called a living trust, or upon the donor’s death, a testamentary trust and must be in writing. The written terms of the trust must be clearly written and understood not only to the trust creator but by the trustee, and the beneficiary(ies) of the trust.
Revocable Trust and an Irrevocable Trust: How They Differ
Trusts are characterized as either revocable (meaning capable of being changed, added to or terminated by the creator at any time after the trust is created but before death) or irrevocable (a trust which cannot be revoked or materially changed by the grantor during his or her lifetime). A revocable trust is flexible. A revocable trust allows the trust maker to change and amend the trust if it is not fulfilling the grantor’s estate planning objectives or if the trustmaker becomes dissatisfied with the way the trust is functioning or there is a change in the trustmaker’s personal or financial life. The assets placed into a revocable trust are included in the gross estate of the trust creator and are (potentially) subject to federal estate and income tax. This can be an important consideration.
An irrevocable trust can offer its creator a potential reduction of death tax and income tax and protection of his or her assets from creditors. As long as the grantor establishes an irrevocable trust, and retains no incidents of ownership or prohibited powers over the assets of the trust, then the assets placed into the trust will generally escape inclusion in the estate of the grantor and will be outside the reach of creditors and predators. But again, with an irrevocable trust, the creator will generally give up legal ownership of what is placed into the trust. Recent increases in the federal estate tax exclusion means fewer individuals will face tax liability when they make a gift to an irrevocable trust. But that could change in 2026 depending upon the 2024 Presidential election.
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) Federal estate tax savings tool. Life insurance proceeds that are kept outside of your estate through proper planning (i.e., an irrevocable life insurance trust) can provide financial and wealth liquidity to heirs for a host of purposes.
There are two ways that an irrevocable life insurance trust (ILIT) can be implemented: (1) the trust can be established and the trustee can purchase a life insurance policy on the life of the insured individual, or (2) an existing life insurance policy can be transferred to the trust. However, in this 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 trust attorney at email@example.com or call him toll-free at (855) 376-5291 for a low cost consultation. He looks forward to hearing from you.
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 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 family 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 family 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 a power of appointment 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