What happens to my revocable living trust when I die?<\/span><\/h2>\nA revocable living trust becomes an irrevocable trust upon your death, and changes can no longer be made to it. Your successor trustee becomes your trustee and then takes on the role of managing the trust funds and distributing the trust assets to your beneficiaries. Your trust will remain in existence for as long as it takes the trustee to complete this process. If a sub-trust was created for property to be held in trust for your spouse or minor children, the trustee would continue to manage the sub-trust until the beneficiary has satisfied all the conditions outlined in the trust in order to receive the full distribution of the trust property.<\/span><\/p>\nOther Types of Trusts Used for Estate Planning<\/span><\/h2>\nWhat is a minor’s trust?<\/span><\/h2>\nA minor’s trust is a type of a testamentary trust used to leave money or other property to a minor but in the care of a trustee (person who manages the property) until the minor attains a certain age. Often minor’s trusts are in effect until the minor attains 18, 21, or 25 years of age. The minor’s trust is created through either a living trust or a will, and it comes into existence on the trust maker’s death.<\/span><\/p>\nWhat is a pot trust?<\/span><\/h2>\nA pot trust, which is sometimes referred to as a “family pot trust,” is a trust in which the makers (usually parents in this type of situation) leave their money for their children or designated beneficiaries in a combined “pot” in one trust, as opposed to separate trusts for each child. The trustee has the discretion to take money from the “pot” for the needs of each child as they arise. Once all of the children have reached a specified age (e.g., 18 or 21), the trust pot is usually divided into separate shares for each of the children. An advantage to a pet trust is that it allows the trustee to make unequal distributions to the beneficiaries as their needs may require. For example, one child may have greater medical needs than the others.<\/span><\/p>\nWhat is a spendthrift trust?<\/span><\/h2>\nA spendthrift trust is a type of irrevocable trust that is created for the benefit of a beneficiary who may have a difficult time managing money and property. The maker of a spendthrift trust names an independent trustee to manage the trust funds. The independent trustee’s powers to protect the beneficiary from frivolous spending can vary and are described in the trust agreement. For example, the trustee may be allowed or required to make cash payments to the beneficiary or to purchase goods and services for the beneficiary. The spendthrift trust protects the trust estate because creditors of the beneficiary cannot attach a claim to trust funds, although they can reach distributions from the trust in the beneficiary’s hands. To create a spendthrift trust, a provision must be included in the trust agreement specifically stating that the maker intends for the trust to be a spendthrift trust.<\/span><\/p>\nWhat is a marital deduction trust?<\/span><\/h2>\nThe estate and gift tax provides for an “unlimited marital deduction.” A spouse can transfer all of his or her assets to the surviving spouse, free of all federal estate and gift tax, regardless of the size of the spouse’s estate. Outright gifts qualify for the deduction, but gifts in trust must meet special Internal Revenue Code requirements. A marital deduction trust is a testamentary trust that meets these requirements.<\/span><\/p>\nSpecifically, the surviving spouse must be the only named beneficiary of the trust. In other words, the surviving spouse is the only person who can receive any assets from the trust for as long as he or she is living. Depending on the type of marital deduction trust, additional requirements must be met. Two common types of marital deduction trusts are the general power of appointment (GPOA) marital deduction trust and the qualified terminable interest (QTIP) trust. A marital deduction trust can be created in a will or living trust.<\/span><\/p>\nWhat is the general power of appointment marital deduction trust?<\/span><\/h2>\nThe general power of appointment (GPOA) marital deduction trust is created by the trust maker’s will or living trust. The maker leaves some or all of his or her estate in trust to the surviving spouse for use during the spouse’s lifetime. The trust provides the surviving spouse with income and trust principal if needed. It also gives the surviving spouse a general power of appointment over the trust assets. A general power of appointment means the surviving spouse has the authority to dispose of the trust property on death as he or she sees fit without any restrictions.<\/span><\/p>\nOn the surviving spouse’s death, the trust assets are distributed to the beneficiaries named in the surviving spouse’s will or living trust, usually the couple’s children.<\/span><\/p>\nThe assets in the GPOA marital deduction trust are not subject to federal estate and gift tax on the death of the first spouse. However, the general power of appointment causes the entire trust to be included in the surviving spouse’s estate on his or her death. If the value of the surviving spouse’s estate is high enough, estate taxes could be owed.<\/span><\/p>\nWhat is a qualified terminable interest trust?<\/span><\/h2>\nA qualified terminable interest trust often referred to as a Q-TIP, is a type of marital deduction trust that can be included in a will or living trust. A qualified terminable interest trust permits the trust maker to do all of the following:<\/span><\/p>\n\n- Give his or her spouse all the income from the trust property for life;<\/span><\/li>\n
- Claim the estate tax marital deduction for the full value of the property transferred to the trust, not just the income;<\/span><\/li>\n
- Name the ultimate beneficiaries of the property on the spouse’s death.<\/span><\/li>\n<\/ul>\n
The QTIP trust must give the surviving spouse the right to all income from the property for life payable at least annually and must prohibit distributions of the trust property during the surviving spouse’s life to anyone other than the spouse. QTIP property, except for the family residence, must be an income-producing property. The trustee can invade the principal for the benefit of the surviving spouse.<\/span><\/p>\nThe trust qualifies as a QTIP trust only if the executor elects to treat the trust property as qualified terminable interest property on the deceased spouse’s estate tax return.<\/span><\/p>\nThis type of trust is often used by those who have been married more than once and have children or grandchildren from previous marriages. The trust allows the maker to ensure that trust assets pass to his or her family rather than to the family of the surviving spouse, as could be the case with a GPOA marital deduction trust.<\/span><\/p>\nOn the surviving spouse’s death, the assets are included in his or her estate. If the estate is large enough, estate taxes may be owed.<\/span><\/p>\nWhat is a qualified domestic trust?<\/span><\/h2>\nA qualified domestic trust, often referred to as a Q-DOT, is a trust that allows married individuals to take advantage of the unlimited estate and gift tax marital deduction when the surviving spouse is a non-US citizen. The transfer of assets outright to a non-citizen surviving spouse is not eligible for the marital deduction.<\/span><\/p>\nWhen property passes estate tax-free to a surviving spouse who is a citizen, it is subject to tax in the surviving spouse’s estate (if not consumed during his or her life). The concern with a non-citizen surviving spouse is that he or she will take the property outside of the United States, where it will not be subject to estate tax on the surviving spouse’s death.<\/span><\/p>\nWith a Q-DOT, the non-citizen surviving spouse is entitled to all of the income generated from the assets held in the trust for his or her entire lifetime, but he or she is not entitled to the principal absent the trustee’s authorization. If the principal is distributed, estate taxes may be owed. When the surviving non-citizen spouse dies, trust assets pass to beneficiaries, usually the couple’s children. The estate tax is payable on the assets left in the trust after the surviving spouse’s death.<\/span><\/p>\nIn order for a Q-DOT to be valid, certain criteria must be met. The executor of the deceased citizen spouse must make an election on the deceased spouse’s return to treat the trust as a Q-DOT. At least one named trustee must be either a U.S. citizen or a domestic corporation. The terms of the trust must provide that the trustee may withhold the amount of a Q-DOT estate tax prior to any distribution of the trust assets. Finally, the trustee must ensure that an adequate amount of trust assets remains within the United States so as to guarantee payment of federal taxes.<\/span><\/p>\nWhat is a credit shelter or bypass trust?<\/span><\/h2>\nA credit shelter or bypass trust allows a married couple with significant assets to minimize their combined estate tax bill. If the first spouse to die leaves his or her entire estate to the survivor, no estate tax is owed because of the unlimited marital deduction. But the full estate will be subject to estate tax on the death of the survivor, reduced by the survivor’s unified credit only. The unified credit of the first spouse to die goes unused. The unified credit allows each individual to transfer a certain dollar value of the property without any estate (or gift) tax liability. For deaths in 2020, the exclusion is $11.58 million.<\/span><\/p>\nA credit shelter or bypass trust allows both spouses to use their unified credits against the estate and gift tax.<\/span><\/p>\nThe bypass trust is created by will or living trust and comes into existence on the first spouse’s death. The will or living trust will provide that the estate of the first spouse to die is divided into two parts. One part, the marital deduction gift, goes to the surviving spouse and is protected from estate tax by the marital deduction. This gift can be outright or in a marital deduction trust.<\/span><\/p>\nThe other part goes into the bypass trust and is sheltered from estate tax by the first spouse’s unified credit. Income from the bypass trust is paid to the surviving spouse during her life. On the surviving spouse’s death, assets in the bypass trust pass to the beneficiaries designated by the first spouse, typically the children. Assets in the bypass trust are not included in the surviving spouse’s estate (they bypass it) because the second spouse is not considered to be the owner of the trust.<\/span><\/p>\nWhat is an irrevocable life insurance trust?<\/span><\/h2>\nAn irrevocable life insurance trust (ILIT) is a trust that you establish to hold your life insurance policy. An ILIT removes life insurance proceeds from your estate. Many people are surprised to learn that life insurance death benefits can be included in the estate of the person who owned the policy. For example, if you purchased a $500,000 life insurance policy on your life, and you are the owner at your death, the entire $500,000 would be included in your estate for estate tax purposes.<\/span><\/p>\nIn addition, an irrevocable life Insurance trust avoids probate and protects the cash value of your life insurance policy from creditors. Furthermore, an irrevocable life insurance trust enables you as the trust creator to control when and how your beneficiaries will receive the proceeds.<\/span><\/p>\nOnce you have transferred a life insurance policy into the trust, you cannot revoke the trust and take the policy back in your own name. However, you can select the beneficiaries and the trustee, the person who will manage the trust. To avoid having the policy proceeds included in your estate for estate tax purposes, your estate should not be a beneficiary.<\/span><\/p>\nWhat is a Crummey trust?<\/span><\/h2>\nOne technique for minimizing estate and gift taxes is to make annual or periodic gifts to your children in an amount that is less than the annual gift tax exclusion ($15,000 per person for 2019). A Crummey trust is an irrevocable trust that enables the trust maker to take advantage of the annual gift tax exclusion while retaining the gift in trust until the beneficiary is older than 21.<\/span><\/p>\nFor the gift tax exclusion to apply, beneficiaries must have a present interest in the gift. In other words, a beneficiary must be able to immediately use the money. Thus, the beneficiary is given the right to withdraw each gift from the trust as the gift is made. The beneficiary must be notified whenever a gift is made to the trust. If the beneficiary (or his or her guardian) doesn’t exercise this right within the period specified in the notice (usually 30 days), the right lapses, and the beneficiary then will be able to access the money only according to the terms of the trust.<\/span><\/p>\nThe Crummey Trust is named after Clifford Crummy, who was the first taxpayer who had set up a trust in this manner.<\/span><\/p>\nWhat is an IRC \u00a72503(c) trust?<\/span><\/h2>\nAn IRC \u00a72503(c) trust is an irrevocable trust established during the trust maker’s lifetime for the benefit of his or her children. Gifts to a trust created under IRC \u00a72503(c) qualify for the annual gift tax exclusion without the need for withdrawal rights that are required for a Crummey trust. However, the trust must meet certain requirements. Both the trust assets and income must be available for the benefit of the beneficiary while the beneficiary is under 21 years old, which means that the trust must have only one beneficiary. Any property remaining when the beneficiary turns 21 must be distributed outright to the beneficiary, unlike the Crummey trust, which permits assets to remain in the trust until the beneficiary is older than 21. If the beneficiary dies before age 21, the trust property must be distributed to his or her estate or as the beneficiary directs under a general power of appointment.<\/span><\/p>\nWhat is an extended IRC \u00a72503(c) trust?<\/span><\/h2>\nAn extended IRC \u00a72503(c) trust is a cross between a Crummey trust and a \u00a72503(c) trust. A \u00a72503(c) trust is simpler to create and administer than a Crummey Trust because there’s no need for annual withdrawal rights and notice to the beneficiary of such rights. However, the fact that a \u00a72503(c) trust must terminate when the beneficiary turns 21 makes the trust undesirable to trust makers who want the assets to remain in trust until the beneficiary is older.<\/span><\/p>\nA one-time right to withdraw the trust assets at age 21 can be used to extend a \u00a72503(c) trust until the beneficiary is older. The withdrawal right in an extended \u00a72503(c) trust must allow the beneficiary to empty out the entire trust. However, the withdrawal right can be limited in time. For example, if the beneficiary does not exercise it within 30 days of turning 21, the trust instrument can provide that the right will lapse, and any funds not withdrawn will remain in trust indefinitely. The annual gift tax exclusion applies to each gift without the need for a Crummey notice.<\/span><\/p>\nWhat is a special needs trust?<\/span><\/h2>\nA special needs trust is a trust that is established to provide for the “special needs” of a disabled beneficiary and still enable the disabled individual to qualify for the government benefits. The term “special needs” is defined as the requisites for maintaining the happiness and comfort of a disabled individual when such requisites are not being met or provided by any governmental or private agency. The law provides an extensive list of “special needs,” including but not limited to medical and dental expenses, education, transportation, rehabilitation, dietary needs, spending money, and items to enhance self-esteem. This type of trust is used as a tool to enhance the lives of any person with a disability, whether that be a disability that began at birth or one that occurred as a result of an accident or illness, or even as a result of old age.<\/span><\/p>\nReceipt of an inheritance, lawsuit settlement, or financial gift could affect a person’s right to continued eligibility for government benefits, such as SSI and Medicaid. If the money is instead placed in a special needs trust, a beneficiary can receive payments from the trust without losing his or her benefits. The disabled beneficiary must not have the power to control the amount of or frequency of the trust distributions or to revoke the trust.<\/span><\/p>\nThere are many types of special needs trusts, but they are generally broken into two major categories. One is a trust that is set up with the assets of the person with the disability and is commonly referred to as a first-party special needs trust. There are several types of first-party special needs trust, including a d4a and a d4c trust. These trusts require that any money remaining in the trust upon the death of the beneficiary is used to pay back any state agency that provided medical benefits to that beneficiary.<\/span><\/p>\nThe other main category of special-needs trust is a third-party special-needs trust. These trusts are set up with the assets or money of someone other than the person who has a disability. There is no requirement of any payback in these types of trusts. So these trusts are used most frequently used by parents who have a child with a disability and want to make sure that that child will be taken care of and not lose their eligibility for their public benefits as a result of an inheritance.\u00a0\u00a0<\/span><\/p>\nWhat is a qualified personal residence trust?<\/span><\/h2>\nA qualified personal residence trust (QPRT) allows the trust maker to transfer his or her residence to his or her children while minimizing estate and gift taxes. A QPRT is an irrevocable trust into which the trust maker transfers his or her home or vacation home (or both in two separate trusts) while retaining the right to live in it for a specific term of years that the trust maker chooses. A QPRT reduces estate taxes by allowing the home to pass to the children at the conclusion of the term without further gift or estate taxes.<\/span><\/p>\nGift tax is imposed on the initial transfer of the home to the trust, but the value of the transfer for gift tax purposes is reduced because the trust maker retains the right to live in the home. This reduction in value depends on the trust maker’s age, current interest rates, and the length of the retained term. All appreciation in the home after the initial transfer passes to the children’s gift and estate tax-free.<\/span><\/p>\nIf the trust maker fails to survive the selected QPRT term, the value of the home is included in the trust maker’s estate. However, the estate receives a credit for any gift taxes paid. If the trust maker wants to live in the home after the trust term, he or she must pay market rent.<\/span><\/p>\nWhat is a grantor retained annuity trust?<\/span><\/h2>\n