| Summer 2010 Newsletter In the Spring Newsletter, we discussed the basics of trusts and trust planning. We talked about revocable and irrevocable trusts, and more specifically, living trusts and life insurance trusts. The Summer Newsletter continues from there…
Credit Shelter (Bypass) Trusts
 As discussed in the Spring Newsletter, there are situations where a beneficiary’s share of an estate would be reduced due to estate taxes which become due on the grantor’s death. Is there a situation where that never happens, where there are never any estate taxes, regardless of the amount inherited? The answer is, “yes,” but that case includes an extremely limited and finite class of beneficiaries. The credit is unlimited when a husband inherits from his wife or a wife inherits from her husband.
So, here’s a good question: If husbands and wives inherit tax free from one another, what happens to the credit of the first spouse to die? Technically, that first credit is lost, unless it is preserved in a Credit Shelter or Bypass Trust. In a Credit Shelter Trust, the credit of the first spouse to die is preserved, in trust, for the benefit of the children, income to the surviving spouse during the surviving spouse’s life. When the second spouse dies, the children receive the benefit of both credits, that of both deceased parents. Without this device, the first credit would be lost completely.
Of course, 2010 is an odd year because there are no federal estate taxes, at least not at this writing. We do not expect this anomaly to last, and expect federal estate taxes to be re-instated. Credit Shelter Trusts are normally included in the Last Wills of a husband and wife, and are indispensible for preserving the credit of the first spouse to die. Including such an option in an estate plan is a must.
Personal Residence Trusts
A Personal Residence Trust is exactly what the title describes it to be: a trust whose only asset is the personal residence of the grantor. These trusts are particularly effective where a grantor wishes to transfer a personal residence to her children over a period of time-certain. Once the term has expired, ordinarily ten or twenty years, then the property passes to the beneficiary-children. The caveat here is that the real property in question must qualify as the principal residence of the grantor, be it a house or cooperative apartment.
While it is not impossible to transfer mortgaged property to a Personal Residence Trust, notification to a lender of the intention to do so may cause significant additional costs. Naturally that is not an issue if the personal residence is owned by the grantor outright. The attractive aspect of this trust is that it allows the transfer of interests in real property during the term-certain at discounted valuations; however, if the grantor dies during the term-certain, there is no tax benefit because the personal residence is brought back into the estate of the grantor for estate tax purposes.
Charitable Split Interest Trusts
For those interested in philanthropy, Charitable Split Interest Trusts are an excellent option because, depending on the type, one can save on income and estate or gift taxes and help a good cause or good causes, all at the same time. This is a vast area, and much of the complexities are outside the scope of this article, but, by way of an introduction, we will present the most common types, and, in general, what they do and how they work.
Apart from charitable foundations, charitable trusts come in one of two types: the Charitable Remainder Trust or Charitable Lead Trust. The idea of helping others while helping oneself appeals to many. Gifting to charity by way of one of these trusts results in income tax deductions, estate or gift tax deductions, and either income stream for life to a grantor or grantors, or remainder gifts to children.
While the method of contribution to the trust varies, the basic difference between the two trusts is that, in the remainder trust, the non-charitable beneficiary receives lifetime income, and on that beneficiary’s death, the remainder in the trust passes to the charity previously designated. A lead trust works in the opposite way: income to the charitable beneficiary for life, but on the death of the grantor, the remainder passes to the non-charitable beneficiary, such as the grantor’s children. While the foregoing is a vast simplification, if one has a favorite charity, such as New York University or New York City Ballet, one can derive enormous social and economic benefits from considering this type of trust planning.
We will conclude our three-part series in the fall. Have a wonderful, healthy summer…………………
The above list is for general information purposes only. It is not intended to constitute individual legal advice or a specific recommendation to any particular client.
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