Posted by Robert L. Arone
If there’s one thing we can all agree on, it is that each client is unique.
Likewise, our approach to counseling these clients should be tailored to each one’s specific needs.
Let’s work together to develop special plans that fit each client’s special circumstances.
One key tool to consider is the niche trust.
Usually, when we speak about a trust, we mean an “express trust.” An express trust is a three-way relationship between the grantor, the beneficiary or beneficiaries, and the third party, or trustee. The grantor has assets he or she wishes to distribute in a specified way to the beneficiary, and the trustee holds those assets on behalf of the beneficiary.
The assets, financial needs, and wishes of each client are particular to that person, so the use of trusts needs to be part of a nuanced strategy. Enter the niche trust. These trusts are designed for very special situations and fulfill particular needs. It’s important to be informed about the types of trusts that are available to use as tools. Let’s explore some of them here.
Health and Education Exclusions Trust (HEET)
This trust is tailored to help clients avoid paying gift tax on tuition and medical care expenses for individuals two or more generations younger than the client. Tuition payments made directly to an educational institution on behalf of one of these beneficiaries are not subject to gift tax. Similarly, payments made directly to a medical care provider that are not reimbursed by the donee’s insurance are also not subject to gift tax. However, in order to qualify for these benefits, at least one beneficiary of the trust must be a charitable organization.
These payments, if made on behalf of a “skipped person” from a non-Generation Skipping Transfer Tax (GSTT)-exempt trust are not considered GSTT transfers.
- TIP: This is a great option if your client has already used their GST exemption.
This trust can either stand alone or be part of a revocable living trust. It is used to provide for the care of pets after the grantor passes or during his or her incapacity, and to appoint someone to care for them. A pet trust also nominates someone to handle the disbursement of funds to cover pet care.
A gun trust is used to pass firearms to heirs in compliance with state and federal regulations outside of probate.
- TIP: Due to the punishment for violating state and federal firearms regulations, it is crucial to seek the assistance of a qualified estate planning attorney when planning for the distribution of firearms.
With an incentive trust, assets are held for the benefit of a beneficiary who must meet certain requirements before a distribution will be made. The requirements are put in place by the grantor and must be met prior to the distribution of any of the principal or income. For example, a grantor could stipulate the funds be distributed:
- Only when the beneficiary has graduated from college.
- Only if a beneficiary abstains from illegal drug use.
While some clients may like the idea of being able to put stipulations on a beneficiary’s inheritance, it is important to note that conditions for the disbursement of assets cannot be illegal or against public policy.
Using either the annual gift tax exclusion or the grantor’s lifetime gift tax exemption, a gifting trust holds and invests property for the benefit of family members. This can be a great strategy for transferring family wealth from an individual in a high income tax bracket to a lower one.
- TIP: If you want to use the annual gift tax exclusion to shelter gifts to the trust for gift tax, you will need to include a Crummey power. A Crummey power is a technique that allows a person (beneficiary of the trust) to receive a gift that would not usually be eligible for gift tax exclusions, and makes that gift eligible. To accomplish this, after each annual gift is made, the beneficiary will be given the opportunity to withdraw the amount. However, in most cases, the beneficiary will leave the money in trust, so as to ensure the grantor will keep making the annual gifts according to the original plan. Because gifts can be made annually, the grantor can stop at any time.
Supplemental Needs Trust (3rd Party)
In a supplemental needs trust, assets are set aside for the benefit of a beneficiary whose disabilities may allow that person to receive public assistance for medical and other care expenses. In order to guarantee that the beneficiary will not lose government benefits or fail to qualify for those they would otherwise be eligible for, it is important to consult an experienced estate planning attorney.
Standalone Retirement Trust
This trust is designed to receive “qualified retirement accounts” like IRAs and 401(k)s. It can be set up as either revocable or irrevocable, and provides additional protections for the inherited retirement account. While the future of the lifetime “stretch” for non-spouse beneficiaries is still in the balance, this type of trust is still a great alternative to allowing a beneficiary to immediately cash out an inherited retirement account. This can be an important consideration when planning for retirement. If it is anticipated that a large sum will be left over in the account upon the passing of a client, planning needs to be done to address this.
Qualified Personal Residence Trust (QPRT)
With a QPRT, a personal residence is the main asset of the trust. The grantor keeps the right to live in the home for a specified number of years, and after that term ends, the home is transferred to the beneficiaries. This means if the grantor survives the term of the trust, the grantor must move out or begin paying rent to the trust in order to continue living there.
This can reduce the burden of gift tax that will be incurred when the residence is transferred to the beneficiary.
Let’s Work Together
All of these trusts are tools in building a comprehensive, personalized estate plan that will make your client happy. The important thing to keep in mind is that estate planning must be a collaboration, taking into account the wants and needs of the client and drawing on the expertise of planners and attorneys. The result will be a robust and individualized plan that will not let your client down. Don’t hesitate to reach out today to work with us.