Trusts for Estate Planning and for Tax Savings
Mendel Center Seminar
March 20, 1996
Vance A. Fisher
Attorney and Counselor
Fisher Law Office
Law & Title Building, P. O. Box 83,
St. Joseph, Michigan 49085
616-983-5511
www.fisherlaw.com
email: fisherv@fisherlaw.com
Copyright 1996 Vance A. Fisher
All rights reserved

I. Trusts are useful for estate planning for pre-death and post-death, and for tax avoidance. If you need one, you should have one. But if you don't, you shouldn't. There is no benefit in unnecessary trusts.

II. What is a trust? The dictionary defines "trust" as "to have or place confidence in; depend on." In law, it is the giving of legal title to someone for the benefit of another. The person holding legal title is the trustee. The person for whose benefit the title is held is called the beneficiary. The interest of the beneficiary is called an "equitable" interest.

III. What is required for a trust? Although some trusts can be created by oral words alone, most trusts are created by written instruments, and all trusts should be in writing. Most trusts in fact have two kinds of writings involved in them: the document of conveyance, like a deed, by which a trustee is given title, and an agreement between the trust creator and the trustee which says what is to be done with the trust property and what powers the trustee is to have with regard to the trust property.

IV. What kinds of property can be put in a trust? Any kind of property can be put in trust: real estate, art collections, stocks, bonds, partnership interests, patents, for example.

V. Why would anyone want a trust? Trusts are useful when someone is to take care of assets for the benefit of another person, or where for tax reasons a trust is needed to separate legal and equitable title.

A. Taking care of assets for the benefit of another person is useful when property to be owned by one person and the benefit given to another. For example, when

1. Someone is a minor and has no parent living.
2. Someone is incapacitated or disabled, whether a minor or not.
3. Someone has little or no financial expertise.
4. Someone wants to be sure he or she is taken care of in the event of future infirmity by someone who has legal responsibility for his or her actions, and to be sure that the assets are transferred to the next generation confidentially.

B. Taking care of assets for the benefit of others is useful when someone wants to keep assets under control for a long time. For example, a dynasty trust can be created which keeps assets under the control of a trustee for the benefit of a whole family line down through grandchildren, or beyond.

C. Separation of assets into legal and equitable interests can be useful for United States federal tax purposes, because the division is recognized by the government.

VI. How does the United States federal tax system currently encourage trusts? Mostly, the encouragement comes from the estate tax laws.

A. There is a graduated Federal estate and gift tax which begins to take hold when a person has made lifetime and death transfers aggregating more than $600,000. The tax is called the unified transfer tax. It covers both lifetime and death transfers.

B. Everything you can think of transferring is probably covered by the unified transfer tax.

1. Real estate.
2. Stocks and bonds.
3. Mortgages, notes and cash.
4. Life insurance.
5. Jointly owned property.
6. Miscellaneous property.
7. Transfers during life.
8. Powers of appointment.
9. Annuities.

All of them are covered by the federal estate and gift tax.

C. There are certain transfers that are not included for federal estate tax purposes:

1. transfers aggregating less than $10,000 per person per year, and
2. transfers to qualified charities, and
3. transfers to a spouse who is a United States citizen.
4. And we must remember that the first $600,000 does not count, either.

We all know about the $10,000 annual exclusion, and most of us know about charitable gifts being exempt, and the $ 600,000 exemption equivalent. But gifts to spouses are also exempt, and that is a very important deduction.

D. The spouse gift exemption is called the marital deduction. The marital deduction provides that anything we give to a spouse, with certain exceptions, is not counted as a transfer for federal transfer tax purposes. This is true whether the gift is during life or at death.

1. Why isn't the marital deduction the answer to estate planning problems? That is, why not just give everything to our spouse? Because everything ends up on the surviving spouse's ownership, and it bunches up the tax bracket, maximizing taxes on the death of the survivor.
2. Then how would you minimize taxes? In the case of a husband and wife who own, in the aggregate, $1,200,000 of market value of assets, one way would be to split the estate and give everything to the children. That is, the husband and wife each take 1/2 of the assets, so each owns $600,000. There is no tax on that transfer, because of the marital deduction. Then each wills all his or her property to the children. No tax results, and the property has been transferred. That is, assuming that no appreciation of the property has resulted before death. If you wanted to avoid the appreciation, you would give the property to the children right now.

a. What's wrong with this picture?

(1) First, we gave away the property before the transferor was finished with it.

(2) Second, we did nothing to take care of the spouse.

(3) Third, we gave property to children who may be minors, and they can't receipt for it (because they're minors), and they can't administer or preserve it, because they're too young.

b. How do we improve the picture? By using trusts. Specifically, by using split-estate trusts.

VII. The estate splitting, or marital deduction, trust works this way.

A. Assume that the wife owns property worth $1,200,000.

B. She gives half the property at death to her husband, outright. The marital deduction protects this property from federal tax. And what she has left is just $600,000, the exemption equivalent, so she has no tax on her estate at all.

C. She puts the rest of the property in trust so that, at her death, the income is payable to her husband and so much of the principal as he needs for his reasonable needs having due regard to his accustomed standard of living.

D. The husband gives his property on death to the children.

E. The wife's trust provides that on the husband's death, the trust property also goes to the children.

F. If the trust is properly drafted, the tax laws treat the trust as if it went to the children, for tax purposes, and it is not taxed to the husband when he dies.

G. The husband's property that he received outright from his wife is taxed to the husband when he dies. But since it's less than $600,000, there is no tax.

H. The result is that we transferred $1,200,000 to children without any estate tax.

I. The tax savings, under existing law, would be over $200,000.

J. Therefore, those of us who have over $600,000 should view tax estate planning as an emergency, if not already attended to.

VIII. What are the differences between living trusts and testamentary trusts, and the advantages and disadvantages of each? Who should be the trustees?

A. A living trust is executed now, between you (called the grantor or settlor or donor) and a trustee (which might also be yourself, or a spouse, or a child, or a professional trustee like a bank trust department).

1. It is confidential under existing law. It is not filed at the probate court. Its terms are not disclosed to the public.
2. Because, however, it is designed to work during life as well as after death, it is more complex than a testamentary or will trust.

B. A trust under a will, sometimes called a testamentary trust, is signed now but needs no trustee until death.

1. On death, it is filed with the probate court. Its terms are potentially available to the scrutiny of the public.
2. It is usually simpler than a living trust.

C. As for choice of trustees:

1. You can be your own trustee, for a living trust. For a testamentary trust, obviously, you cannot.
2. Whether or not a family member or friend can be a trustee depends upon whether or not it is one of the "tax saving trusts" we will talk about in a minute.
3. For one of the tax trusts, it is probably best to have a professional trustee after you are no longer trustee.

IX. What other kinds of trusts are there, which are useful for tax purposes? The answer is simple: If a husband and wife has assets over $1,200,000, or if a single person has assets of over $600,000, there is more tax planning to be done to avoid estate tax. Some of the planning can be done with trusts:

A. The "Crummey" life insurance trust. If you put life insurance into a trust, and put other assets into the trust to pay the premiums, you may be able to remove the value of the insurance, or most of it, from your estate. This is called a "Crummey Trust."

B. The charitable trust.

1. If you give property outright to a charity, it qualifies for the estate tax charitable deduction.
2. If you give an income interest to charity (called a charitable lead trust), or a remainder interest to charity (called a charitable remainder trust), the charitable interest may also qualify for the charitable deduction. The economic value of the charitable interest may be less than the tax savings from the deduction. That is, the partial charitable interest may leverage the charitable deduction of the law.
3. There are 3 kinds of interests that are deductible: the annuity trust, the unitrust, and the pooled income fund.

a. The annuity trust gives a fixed amount to the beneficiary each year.

b. The unitrust gives a fixed percentage to the beneficiary each year.

c. The pooled income fund is a participation interest in the donee's investments. These, like any investment, must be very carefully evaluated.

C. The grantor retained interest trusts (GRITS), which may be a

1. Qualified personal residence trust (QPERT), a
2. Grantor retained Annuity Trust (GRAT), or a
3. Grantor retained unitrust (GRUT).

All of these attempt to leverage the economic value and the tax savings value of spilt trust interest.

X. The federal estate tax laws of the United States also provide an additional and confiscatory tax on transfers to the second generation. One might think that one could transfer property to the grandchildren and avoid the tax at the children's level. This is not the case, and a special, generation skipping transfer tax is imposed. That tax is in addition to the federal estate tax, and is at the 55 percent rate. Rules are complex and exemptions are available. Drafting is difficult and the concepts are demanding. However, estate planners need to keep it in mind.

XI. Trust law is complex, and the tax laws are complex. Under no circumstances should anyone not comfortable with a layman taking out their appendix attempt to draft their own trusts, whether or not using prepared forms.

XII. A major portion of the practice of Fisher Law Office involves the preparation of trusts, and other estate planning documents, and the administration of estates.

February 28, 1996

Revised March 25, 1996