Trust Settlement FAQ
A trust, revocable or irrevocable, is a private document. Once a grantor transfers property into the trust, a trustee holds legal title for the benefit of one or more beneficiaries, who are the beneficial owners. Three parties must be present in the trust creation: the grantor, trustee and the beneficiary although for a revocable trust, the grantor may also be the trustee and primary beneficiary. Upon the grantor’s death, the trust terms become fixed, or irrevocable, and there must be a remainder beneficiary for ongoing administration.
A trust must be funded to have any legal effect, and one does so by transferring property into the trust by re-titling it in the name of the trust. One may also purchase assets in the name of the trust once it is settled. The grantor may transfer such assets as individually held bank and brokerage accounts, LLC interests and corporate stock, and may assign artwork or jewelry to the trust. Finally, a grantor may transfer real property to a trust either by purchasing the real property in the name of the trust or by re-titling the deed into the name of the trust.
A testamentary trust is a trust that is contained in a Will. Testamentary trusts are effective upon the death of the Will maker and are subject to oversight by the Surrogate's Court. Generally, testamentary trusts are created for young children, relatives with disabilities, or others who may receive large inheritances but might lack the ability to properly manage them. Testamentary trusts are subject to ongoing oversight and administration fees by the Surrogate’s Court.
An irrevocable life insurance trust, or ILIT, allows the grantor to place one or more insurance policies into an irrevocable trust for the benefit of one or more beneficiaries. Once the grantor transfers an insurance policy to an ILIT, the grantor may not take the policy back in their own name, nor serve as a trustee or a beneficiary. The grantor may, however, dictate whom the ILIT beneficiaries will be and define the terms under which they will receive ILIT funds. Once the grantor settles the ILIT, the grantor must send written requests to the trustee in order to fund it. Properly settled, the ILIT funds are not part of one's taxable estate after three (3) years and upon the grantor's death, loved ones are provided with quick and oftentimes sorely needed liquid assets to administer the grantor's estate.
A credit shelter trust, otherwise known as a bypass trust, allows married couples to reduce estate taxes by taking advantage of their combined federal and state estate tax exemptions. The surviving spouse has access to the income from the property transferred to the trust without it being included in their own estate. Each spouse executes a trust to "shelter" their exemption amount. Income from the shelter trust along with trust principal will be made available to the surviving spouse, at the discretion of the trustee. As the surviving spouse does not control distributions of principal, shelter trust funds are not included in their estate, nor are they subject to estate tax upon the death of the surviving spouse. Shelter trust funds, along with the unused portion of the surviving spouse's marital trust, flow through to the remainder beneficiaries who are usually the children.
A QDOT is a type of trust for the benefit of a surviving spouse who is not a United States citizen. A QDOT is available only for the estates of decedents dying after November 10, 1988. Its effect is to preserve the estate tax marital deduction for property passing to a non-citizen surviving spouse, which Internal Revenue Code section 2056(d) would otherwise deny. At least one trustee of a QDOT must be a U.S. citizen or a domestic corporation authorized to withhold estate taxes. Although a valid QDOT allows a qualifying non-citizen surviving spouse to take the marital deduction on assets within the trust, the trust is not exempt from estate tax. The tax is deferred until the death of the surviving non-citizen spouse.
A SLAT is a type of grantor trust that is taxed to the trust grantor so that the trust funds grow tax free. SLATs are similar to ILITs and can avoid the paperwork required for withdrawals from ILITs. In addition, SLATs unlock life insurance cash values for the living needs of the surviving spouse. The lifetime distributions to the spousal beneficiary are limited to an ascertainable standard such as health, education, maintenance and support.
A pet trust is settled for the benefit of a domestic or pet animal, and under EPTL 7-8.1 it is valid in New York and runs for the life of the animal. New York sets no dollar limit on the amount that may be left. Under EPTL 7-8.1(d) a court may reduce the amount transferred only if it determines that the amount substantially exceeds what the intended use requires, so the practical question is whether the funding is supported by a documented estimate of the animal's lifetime care, including veterinary costs, boarding, caretaker compensation and life expectancy. The instrument should also name a contingent beneficiary to receive whatever is unexpended when the trust terminates.
An SNT allows funds to be made available to a disabled person without those funds being counted against Medicaid and SSI benefits. SNT requirements include that SNT funds may never be given directly to an SNT beneficiary and that SNT funds may only supplement, not supplant, governmental benefits. Should a disabled person receive lawsuit proceeds yet also have large medical expenses, without an SNT they might quickly exhaust those proceeds. Current recipients of Medicaid or SSI benefits, disabled individuals who are potential recipients of Medicaid, SSI or other means-tested benefits, individuals with a long-term history of mental illness who will likely require medical/psychiatric care throughout their lifetime, and individuals with conditions such as dementia who will likely require long term care might all benefit from the use of an SNT.
A GRAT lets you transfer an asset into a trust while retaining the right to receive annuity payments back for a fixed term, typically two to ten years. If the asset grows faster than the IRS's assumed rate during that term, the excess growth passes to your beneficiaries with little or no gift tax; if it doesn't outperform, you simply receive your annuity payments back — nothing is lost. Because of that asymmetry, a GRAT is most effective with an asset you expect to appreciate quickly or that's currently undervalued — and the main risk is dying before the term ends, which can undo the benefit, so term length matters.
An IDGT is an irrevocable trust deliberately structured so that you, the grantor, continue paying the income tax on the trust's earnings even though the assets themselves are out of your taxable estate. Paying that tax is itself a further tax-free gift to your beneficiaries, since it lets the trust's assets grow undiminished by income tax — and it lets you sell appreciating assets to the trust, often in exchange for a note, without triggering capital gains tax on the sale. It's a technique best suited to a business interest, real estate, or a portfolio you expect to substantially outgrow the exemption.
A Dynasty Trust is designed to hold assets for multiple generations, shielding them from estate tax, creditors, and divorce at each generational transfer. New York, however, still enforces a rule against perpetuities — broadly, lives in being plus twenty-one years — so a trust governed by New York law can't last truly forever the way one can in a state like South Dakota, Nevada, or Delaware, each of which has abolished the rule. Because of that, families who want a genuinely perpetual dynasty trust often establish it under one of those states' laws instead, even while remaining New York residents; we regularly coordinate that kind of out-of-state trust arrangement for clients.
The right vehicle depends on how much control and visibility you want. A donor-advised fund is the simplest and least expensive to set up, giving you an immediate tax deduction and ongoing recommending authority over grants, but no independent legal existence. A private foundation costs more to run and carries a mandatory minimum annual payout and public filing requirements, but gives your family lasting, direct control — including the ability to employ family members and put your name on it. A charitable remainder trust sits between the two: it pays income to you or your family for a term or for life, with the remainder passing to charity, which makes it useful when you want to convert an appreciated asset into an income stream while ultimately benefiting a cause you care about.