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Solano Magazine /  Finance /  Estate Planning Tools

Estate Planning Tools

According to Forbes Magazine, these eight tools are amongst the most common estate planning tools. These are intended to provide only general information. You should consult with an attorney for specific advice based on your particular situation and objectives.

Charitable Lead Trust
A charitable lead trust (CLT) is the opposite of a charitable remainder trust. The trust will make annuity or unitrust payments to charity, generally for a specified number of years, after which the balance of the trust assets will pass to, or in trust to, one or more noncharitable beneficiaries. If the trust is set up so that the present value of the annuity payments is equal to the value of the property contributed to the trust, and if the trust earns more than the assumed rate, the balance of the trust at the end of the term can go to or in further trust for the donor’s family free of estate or gift tax.

Charitable Remainder Trust
You can contribute property to a charitable remainder trust (CRT), which will make payments to one or more persons for life or for a term of up to 20 years, after which the trust ends and the balance goes to charity. The payments must be a specified percentage of the value of the trust, at least 5%, either of the initial value of the trust (an annuity trust) or of the value of the trust recalculated annually (a unitrust). Since the trust is exempt from income tax, this allows someone with appreciated property to diversify out of the appreciated asset without current capital gains tax.

Grantor Retained Annuity Trust
You can contribute property to a trust and retain the right to annuity payments from the trust for a specified number of years. The annuity payments are valued based upon interest rates prescribed by the IRS based upon prevailing interest rates. If the trust assets grow at a higher rate than the assumed interest rates, the additional growth is removed from your estate, assuming you survive for the term of the trust.

Qualified Personal Residence Trust
You can transfer your residence to a trust and retain the right to use it for a specified number of years. The advantage of this is that, if you survive for the term of the trust, the entire value of the residence is removed from your estate, while the taxable gift is discounted to present value for the number of years of the term, as well as for the possibility that you do not survive for the full term.

Intentionally Defective Grantor Trust (IDGT)
You can contribute property to a trust that will not be included in your estate, but for income tax purposes, you will pay tax on the trust’s income as if the trust did not exist. The advantage of an IDGT is that your payment of the income tax is not treated as an additional taxable gift.

Trusts for Children
If you leave property to a child in trust (rather than outright) the assets will not be included in the child’s estate. The assets will also be better protected against the child’s spouse and potential creditors, while the child can still have a substantial degree of control. Such a trust is sometimes called a lifetime or generation-skipping trust. There may be a generation-skipping transfer tax upon the child’s death or if distributions are made to a grandchild during the child’s lifetime.

Marital Trust
Property passing to a spouse generally qualifies for the marital deduction and is not subject to estate tax. In addition, property passing to the spouse in a trust in which the spouse is entitled to all of the income for life qualifies for the marital deduction. Such a trust is called a marital or QTIP or A trust. This allows you to get the marital deduction without having to give the spouse control over the principal of the trust.

Credit Shelter Trust
If you leave your entire estate to your spouse, it will qualify for the marital deduction and you will not pay any estate tax. However, your spouse will only have one $2 million exemption. A common technique is to leave the $2 million exempt amount in a trust that will be available if the spouse needs it, but will not be included in the spouse’s estate. Such a trust is called a credit shelter or bypass or family or B trust.