Trusts: An Essential Planning Tool

Trusts: An Essential Planning Tool

January 30, 2013

Presented by
Michael C. McBratnie, Esq.
and
Gregory M. Wirt, Esq.
© 2013 Fox Rothschild

Introduction

 Basic Concept of a Trust

A legal relationship in which one persons
agrees to hold property or assets for
another.


Introduction
 Four Elements to a Trust

- Grantor/Settlor - person who creates the trust

- Trustee - person or entity that agrees to hold the
trust assets for the beneficiary

- Beneficiary - person that benefits from the trust

- Trust Assets - assets or property contributed to the
trust by the grantor/settlor


Introduction
Grantor/Settlor

Trust
Assets

Beneficiary Trustee


Types of Trusts
 Testamentary Trust

- A trust created under an individual’s Last
Will and Testament

- Becomes effective upon the death of the
decedent


Types of Trusts
 Inter-Vivos Trusts

- A trust created during the settlor’s lifetime

- Becomes effective upon execution of the
trust document and funding of the trust


Types of Trusts
 Revocable Trusts (“Living Trusts”)
- An inter-vivos trust created during the settlor’s lifetime that can
be amended or revoked by the settlor at any time

- Includes provisions governing distributions of trust assets
during the settlor’s lifetime and following the settlor’s death

- May serve as a Will substitute

- Assets within the trust avoid probate upon the settlor’s death


Types of Trusts
 Irrevocable Trusts

- A trust that can not be modified or terminated after
being created by the settlor

- Irrevocable trusts may be inter-vivos or
testamentary trusts

- One of the primary purposes of an inter-vivos
irrevocable trust is to avoid “incidents of ownership”
by the settlor and exclude the trust assets from the
settlor’s estate


Types of Trusts
 Grantor Trust

- Grantor trusts are created if the “owner” has
certain interests in the trust or retains certain
powers over the trust under Sections 671 –
679 of the Code

- All income of the trust is reported on the
settlor’s income tax return


Types of Trusts
 Intentionally Defective Grantor Trust

- Irrevocable trust in which the settlor
intentionally retains powers or interests to
cause the trust to be a grantor trust

- Settlor reports the trust income on his/her
income tax return but the trust assets are
excluded from the settlor’s estate


Types of Trusts
 Grantor Retained Annuity Trust (“GRAT”) and
Grantor Retained Unitrust (“GRUT”)

- Created by the settlor transferring assets into an
irrevocable trust and retaining the right to an annuity
interest for a fixed term of years

- When the term ends, assets remaining in the trust
are distributed to the remainder beneficiaries,
outright or in further trust


Types of Trusts
 Charitable Remainder Annuity Trusts (“CRAT”)
and Charitable Remainder Unitrust (“CRUT”)

- Irrevocable trust with a non-charitable annuity
interest and charitable remainder interest

- Donor receives an income tax deduction for the
present value of the charitable remainder interest


Types of Trusts
 Charitable Lead Annuity Trust (“CLAT”) and
Charitable Lead Unitrust (“CLUT”)

- Irrevocable trust with a charitable lead interest and
non-charitable remainder interest

- Provides a large charitable income tax deduction in
the first year and allows a “discounted” gift to the
non-charitable beneficiaries


Types of Trusts
 Qualified Personal Residence Trust (“QPRT”)

- An irrevocable trust that is designed to reduce the
value of a personal residence for gift tax purposes

- Settlor transfers the personal residence into the
QPRT and is permitted to continue living in the
residence for a term of years


Types of Trusts
 Irrevocable Life Insurance Trust (“ILIT”)

- Irrevocable trust designed to own a life insurance
policy on the life of the settlor

- ILIT is the owner and beneficiary of the policy

- Intended to avoid inclusion of the life insurance
policy in the settlor’s estate


Types of Trusts
 Dynasty Trust

- Irrevocable trust designed to last for multiple
generations (or forever) without estate, gift or GST
taxes

- May be limited by the Rule Against Perpetuities

- Repeal of the Rule Against Perpetuities by states
has increased the popularity of Dynasty Trusts


Types of Trusts
 Spousal Lifetime Access Trusts (“SLAT”)

- Irrevocable trust that names the settlor’s
spouse as a beneficiary and possibly
settlor’s descendants as additional
beneficiaries

- Includes provisions that allow distributions to
the spouse during his or her lifetime


Asset Protection
 Spendthrift Trusts

 Self-Settled Asset Protection Trusts
- Domestic (Alaska, Delaware, Nevada, etc.)
- Off-shore


PA Uniform Trust Act
 Is an irrevocable trust really irrevocable?

- Non-judicial settlement agreements

- Modification or termination of trusts upon consent
of the settlor and beneficiaries

- Modification or termination of trusts by the
beneficiaries with court approval

- Federal estate tax consequences?


Thank You.

Michael C. McBratnie, Esq.
610.458.4946
mmcbratnie@foxrothschild.com

Gregory M. Wirt, Esq.
610.458.3113
gwirt@foxrothschild.com


Trusts: An Essential Planning Tool

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