CFP

Liquidity, Powers of Appointment, and Trusts - Types and Basic Provisions

Types and Basic Provisions

  • Totten Trust
    The Totten Trust refers to certain types of accounts established at financial institutions that can be set up to pay to a certain beneficiary at the death of the account owner. These "payable on death" (POD) accounts are fully controlled by the owner during their lifetime, and consist of individual accounts located at banks and most brokerage firms. Individuals setting up these accounts as POD or TOD (transfer on death) the heirs of the account can avoid probate of the assets.
  • Spendthrift Trust
    A Spendthrift Trust is a trust setup with "spendthrift provisions or clauses" that protect the trust assets and the beneficiary assets from creditors of the beneficiary. The trust is normally created to allow the trustee to control the distribution of the trust's assets to the beneficiary(s) in order to manage the spending habits of the beneficiary(s). The creator of the trust might also be afraid that the beneficiary would "blow through" the assets of the trust if a controlled budget and independent trustee was not in place to maintain stability.
  • Bypass Trust
    The Bypass Trust, also known as the "B-Trust" or "Credit Shelter Trust," uses trust assets to provide the surviving spouse with income for the rest of his or her life, as well as principal from the trust for his or her healthcare expenses, education expenses and costs for his or her support and maintenance. This trust was primarily used to take advantage of the deceased's estate tax exemption amount whereas the assets placed in the trust would not be treated as being owned by the surviving spouse for tax purposes, and would therefore not be included in his or her estate for purposes of federal estate tax liability. Upon the surviving spouse's death, the assets could be passed to the trust's beneficiaries without estate tax.

    Note:
    In 2010 a new estate tax system was signed into law that allows the executor of a deceased spouse's estate to transfer the deceased spouse's unused tax exemption to his or her surviving spouse. The new change now makes it possible for a deceased spouse's unused estate tax exemption to be stacked on top of the surviving spouse's exemption without the use of a bypass trust.
  • Marital Trust
    The Marital Trust, also known as the "A-Trust" or "Power of Appointment Trust," is a trust utilized by the grantor as an unlimited marital deduction trust to transfer assets to their spouse in the name of trust. The spouse is given the right to income for life and a general power of attorney over the trust's assets. If the spouse does not use all of the trust's assets over their lifetime, then the remaining assets will be includable as part of their taxable estate.
  • Qualified Terminable Interest Property (QTIP) Trust
    The QTIP Trust is a marital trust set up by a grantor to transfer unlimited amounts of assets under the unlimited marital deduction to this trust for the benefit of the spouse. The spouse receives income for life from the trust, but is usually not given power of appointment. Generally, this trust is used by the grantor to take care of the surviving spouse for life (income from the trust), but in turn leave the trust's assets to children or other family members (corpus or principal). Assets are included in the estate of the surviving spouse at death; however, the trust can be used to pay the pro-rata share of estate tax due.
  • Pour-Over Trust
    The Pour-Over Trust is a simple term meaning that property is transferred or "poured over" from an estate or another trust into a preexisting trust. If a pour-over will is established, it can be used to catch forgotten assets and direct them to be placed in the pour-over trust. To have legal effect, the trust must be in place prior to the creation of the will. Assets from other sources such as IRAs and insurance proceeds can also "pour-over" into this type of trust at the death of the creator.
  • Section 2503(b) Trust
    The Section 2503(b) Trust is also known as the "Mandatory Income Trust" for minors. This irrevocable trust is established by the grantor to provide an annual income source for the care and welfare of a minor child. The income is taxable to the trust beneficiary (child) and the child does not have access to the trust's assets until adulthood. The donor may meet the requirements of annual gift tax exclusion.
  • Section 2503(c) Trust
    The Section 2503(c) Trust is another irrevocable trust for minors. Both the income and principal distribution is discretionary until the minor becomes an adult. Income not paid out to the child is taxed at trust tax rates. Upon reaching the age of majority (age 21), the trust becomes the property of the now adult child. If the beneficiary elects to leave the property in the trust, they must still pay income taxes on the trust earnings even though it is not distributed to them.
  • Sprinkling Provision
    Under a "sprinkling provision," the trustee can be authorized to distribute income of the trust among children and other beneficiaries based on their need or simply in the trustee's discretion. This flexibility allows the trustee to be tax sensitive to the beneficiaries needs, giving the trustee the power to distribute the income to the children beneficiaries or those in lower tax brackets.




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