Skip to main content
Estates & Trusts

Trusts 101: Types of Trusts

By June 21, 2017No Comments

Are you thinking about setting up a trust? People use trusts to help manage assets, ensure financial security of loved ones, avoid probate, and to make donations to charities. There are many unique types of trusts and it is important to select the right one to accomplish your goal. Let’s take a look at some of the basic characteristics of these trusts.

  Irrevocable Life Insurance Trust – ILIT

  • Trust contribution is used to obtain a life insurance policy on the trustor.
  • Insurance proceeds are tax exempt for both of the spouses’ estates (if surviving spouse is only an income beneficiary of the trust).
  • Insurance proceeds are available to surviving spouse through their life and any remaining assets are distributed to their children at the surviving spouse’s death.
  • Annual insurance premiums qualify for the annual gift tax exclusion if certain requirements are met.

Charitable Remainder Annuity Trust – CRAT

  • Irrevocable trust.
  • Noncharitable income beneficiary must receive annuity income of at least 5% of the original trust contribution.
  • Trust permits only one single contribution with no additional future contributions.
  • Immediate income tax deduction for the computed value of the charitable gift.
  • Remainder contributed to designated charity at the surviving spouse’s death.

Charitable Remainder Unitrust – CRUT

  • Irrevocable Trust
  • Noncharitable income beneficiary receives set income of at least 5% of the yearly value of the principal. The principal of the trust is revalued annually.
  • Income amount can be the lesser of the unitrust amount or the amount earned by the trust with deficiencies paid in later years when earnings are higher.
  • Income can change from year to year based on the value of the principal.
  • Remainder contributed to designated charity at the surviving spouse’s death.

Charitable Lead Annuity Trust – CLAT

  • Qualified charitable organization receives income payments in set periodic installments of at least 5% of the original trust contribution for a set term.
  • Trust permits only one single contribution with no additional future contributions.
  • Noncharitable beneficiary receives the principal after the trust term expires.

Charitable Lead Unitrust – CLUT

  • Qualified charitable organization receives set income payments of at least 5% of the yearly principal amount in the trust. The principal of trust is revalued annually.
  • Income and deductions are taxable to the grantor.
  • Noncharitable beneficiary receives the principal after the trust term expires.

Intentionally Defective Grantor Trust (IDGT)

  • A powerful estate planning tool used to freeze assets for estate tax purposes.
  • If properly structured, the transfer of the grantor’s properties to the trust is considered a gift for gift and estate tax purposes. The assets receive a step-up in basis upon the death of the grantor.

Again, setting up a trust offers many benefits, but there are complex tax issues involved. If you have any questions regarding the different types of trusts, please contact your L&B professional at 858-558-9200

Leave a Reply

SafeSend - a safe and easy solution for your tax engagements! Learn More >>
+