There are many ways to transfer wealth, achieve philanthropic objectives, protect assets and manage tax exposure — and trusts are among the most flexible planning tools available. Building on the fundamental knowledge of how trusts work and their key tax and asset protection implications, it’s important to be aware of the specific tools available to address unique needs and goals.
Not all the tools listed below are freestanding trusts. Some are tax elections made available to certain trusts, while others are provisions or powers that can be included within a trust agreement. Regardless, ensure you understand the mechanics, benefits and drawbacks of each before entering into or amending a trust with your advisers. Below is a high-level look at some of the most common options:
- Intentionally Defective Grantor Trust (IDGT)
Allows grantors to make completed gifts to beneficiaries with a trust that is intentionally disregarded for income tax purposes, which provides wider tax benefits.
- Irrevocable Life Insurance Trust (ILIT)
Owns life insurance policies, keeping the policy proceeds out of the insured’s taxable estate.
- Grantor Retained Annuity Trust (GRAT)
Allows the grantor to transfer assets to beneficiaries while retaining an annuity interest for a specified term.
- Charitable Remainder Trust (CRT)
Offers tax benefits by providing income to beneficiaries for a term, then distributing remaining assets to charity.
- Charitable Lead Trust (CLT)
Potentially reduces gift and estate taxes by providing income to charity for a term, then distributing remaining assets to noncharitable beneficiaries.
- Asset Protection Trust (APT)
May provide a degree of protection from future creditors when established and administered in compliance with applicable state law.
- Electing Small Business Trust (ESBT)
Elects special tax treatment allowing it to hold S Corporation stock without terminating the corporation’s S election — unlike a QSST, an ESBT may have multiple beneficiaries.
- Qualified Subchapter S Trust (QSST)
Meets specific statutory requirements that permit ownership of S Corporation stock while preserving the corporation’s S election — generally limited to a single income beneficiary.
- Swap Power
Can be included in certain trust agreements, allowing the grantor to substitute trust assets for other assets of equal value, often used for tax planning.
- Spendthrift Provision
Can be included in a trust agreement to help protect a beneficiary’s trust interest from voluntary or involuntary transfer, including certain creditor claims.
Whitepaper
A Guide to Understanding Trusts & Taxes
Read the Whitepaper
Contact Tim Kaiser or a member of your service team to discuss this topic further.
In this blog Cohen & Co is not rendering legal, accounting, investment, tax or other professional advice. Rather, the information contained in this blog is for general informational purposes only. Any decisions or actions based on the general information contained in this blog should be made or taken only after a detailed review of the specific facts, circumstances and current law with your professional advisers.