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Home » Should I Create a Secret Trust?

Should I Create a Secret Trust?

June 17, 2020Trust in Indianapolis

  • Plainfield area trust attorney

There is a very good chance you will decide to incorporate at least one trust into your estate plan given how popular trusts are. In fact, you might choose to create a secret or semi-secret trust. A Plainfield area trust attorney at Frank & Kraft explains what a secret trust is and why you might want one.

The Last Will and Testament

Most people are familiar with the concept of a Will. At its most basic, a Will is a legal document that allows the Testator (person executing the Will) to make gifts of assets owned by the Testator at the time of his/her death. Because a Will must be submitted to the court for probate, the terms of a Will become available to the public. Therefore, gifts made in a Will cannot be concealed or kept secret.

The Trust Agreement

A trust is a relationship whereby property is held by one party for the benefit of another. A trust is created by a Settlor (also referred to as a Maker or Grantor), who transfers property to a Trustee. The Trustee holds that property for the trust’s beneficiaries.  All trusts are first divided into one of two categories – testamentary or inter vivos – the latter of which is more commonly referred to as a living trust. A testamentary trust is a trust that arises upon the death of the Settlor and which is typically activated by a provision in the Settlor’s Will.  A living trust is a trust that takes effect as soon as all the legalities of creation are in place. Assets gifted in a trust are distributed according to the terms of the trust agreement. Although a trust agreement does not typically need to be submitted to a court, the existence of a testamentary trust itself as well as the identity of the beneficiaries of the trust, are usually included in a decedent’s Will.

What Is a Secret or Semi-Secret Trust?

A secret trust is one in which a Testator appears to leave assets outright to someone in a Will; however, that beneficiary is really a Trustee for another beneficiary. For example, you might leave $100,000 in your Will to John Smith absolutely when, in fact, you have made it clear to John Smith that the $100,000 is intended to be used for the benefit of a third party.

A semi-secret trust is one that is mentioned in a Testator’s Will; however, the names of the trust beneficiaries and/or other terms of the trust are not mentioned in the Will. By way of illustration, imagine that you gifted that same $100,000 to a trust in your Will and simply stated that the funds are “to be used according to my wishes.” In that case, the existence of the trust is made public in your Will; however, the beneficiaries and terms of the trust are not made public.

The creation of a secret or semi-secret trust requires an arrangement between the Testator and the Trustee of the trust. That arrangement should, ideally, be set out in a separate document. Some people do make oral agreements; however, doing so is risky because upholding an oral agreement is always more difficult than upholding one in writing.

Do I Need a Secret Trust?

Keeping a trust secret is usually done for one of two reasons. Either a Testator wants to keep the terms of his/her estate plan out of the public eye altogether or wants to keep beneficiaries/heirs from knowing the terms of that plan. Public figures, celebrities, and individuals with considerable wealth may simply want to avoid public scrutiny. You do not need to fall into one of those categories, however, to benefit from a secret or semi-secret trust. Maybe you simply do not want all your heirs to know how you distributed your assets. Using a secret or semi-secret trust allows you to keep those details private.

Contact a Plainfield Area Trust Attorney

For more information, please join us for an upcoming FREE seminar. If you have additional questions or concerns about creating a secret trust, contact an experienced Plainfield area trust attorney at Frank & Kraft by calling (317) 684-1100 to schedule an appointment.

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Paul A. Kraft, Estate Planning Attorney
Paul A. Kraft, Estate Planning Attorney
Paul Kraft is Co-Founder and the senior Principal of Frank & Kraft, one of the leading law firms in Indiana in the area of estate planning as well as business and tax planning.

Mr. Kraft assists clients primarily in the areas of estate planning and administration, Medicaid planning, federal and state taxation, real estate and corporate law, bringing the added perspective of an accounting background to his work.
Paul A. Kraft, Estate Planning Attorney
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Trust Administration Steps
To ensure that your estate doesn’t lose assets to federal gift and estate taxes you may need to include tax avoidance strategies in your estate plan. One estate planning tool that can provide tax avoidance benefits is a Grantor Retained Income Trust, or GRIT. Always consult with your estate planning attorney before deciding what tools to incorporate into your estate plan. In the meantime, however, the Indianapolis trust attorneys at Frank & Kraft explain how a Grantor Retained Income Trust works and why you might want to include one in your estate plan. What Is a GRIT? A GRIT is a specialized type of irrevocable trust that allows the Grantor (creator of the trust, also referred to as the “Settlor”) to transfer assets into the trust while retaining the right to receive all of the net income from the trust assets for a fixed term of years, referred to as the “initial term.” Income from the trust is distributed to the Grantor at least annually during the initial term. At the end of the initial term, the remaining principal is either distributed to the trust beneficiaries or remains in the trust for the benefit of those beneficiaries. The primary benefit of a GRIT is that if (this condition is important) the Grantor survives the initial term, the value of the principal held in the GRIT is excluded from the Grantor’s estate for federal gift and estate tax purposes. How Does a GRIT Help with Tax Avoidance? The tax avoidance benefit of a GRIT is found in how the value of the trust principal is determined because those assets are valued at a discount. The value of the discount depends on the length of the initial term of the GRIT, and the applicable federal rate in effect at the time the GRIT is established. The transfer of assets to a GRIT constitutes a gift equal to the total value of the assets transferred to the GRIT, less the present value of the retained income interest held by the Grantor for the initial term. If the Grantor survives the initial term, the assets comprising the GRIT will pass to the designated remainder beneficiaries at a reduced gift tax value. GRIT Beneficiaries Section 2702 of the Internal Revenue Code determines who you cannot name as a beneficiary in a GRIT. Excluded beneficiaries include your spouse, your ancestors or the ancestors of your spouse, any lineal descendant of yours or your spouse, any sibling of yours or your spouse, or the spouses of any of the foregoing persons. You can name lineal descendants of siblings, (nieces and nephews) relatives even more distant than nieces and nephews, or friends of yours or your spouse as beneficiaries of a GRIT. How a GRIT Works in Practice Imagine that you establish a 15-year GRIT and transfer $100,000 of assets into the trust and that the applicable federal rate is five percent. As the Grantor, you will receive the income from the GRIT during the initial term. The present value of the retained income interest is $66,007, making the value of the gift $33,993. If you survive until the end of the initial term, however, the remainder beneficiaries will receive $100,0000 plus all capital growth. Your estate, however, will only need to acknowledge a lifetime gift in the amount of $33,993 (the applicable value of the gift at the time it was made). Disadvantages of Using a GRIT Just like most tax savings tools and strategies, there are some disadvantages to relying on a GRIT. First, it is an irrevocable trust, meaning if your personal circumstances change, you cannot make corresponding changes to the trust. Second, if you do not survive the initial term the advantages gained by creating a GRIT do not apply. Contact the Indianapolis Trust Attorneys For more information, please download our FREE estate planning worksheet. If you have additional questions or concerns about establishing a Grantor Retained Income Trust, contact the experienced Indianapolis trust attorneys at Frank & Kraft by calling (317) 684-1100 to schedule an appointment.
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