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Home » Understanding Trusts

Understanding Trusts

November 16, 2021Trust in Indianapolis

Indianapolis trust attorneys

Most people are familiar with the concept of a trust; however, the thought of creating a trust can be a bit intimidating. If you are considering the use of a trust in your estate plan, deciding on which type of trust is best for your needs and goals is the first step toward incorporating a trust into your plan. The Indianapolis trust attorneys at Frank & Kraft explain the different types of trusts available.

Testamentary Trusts

A testamentary trust is a trust that doesn’t activate until the death of the Settlor through a provision in the Settlor’s Last Will and Testament. Because a testamentary trust is activated by a provision in a Will, it is always revocable up to the time of the Settlor’s death because a Will is always revocable.

Living Trusts

Formally known as an “inter vivos” trust, a living trust is a trust that is activated during the lifetime of the Settlor once all the formalities of creation are in place. A living trust can be either revocable or irrevocable.

Revocable Trusts

A revocable trust is one that can be modified, terminated, or revoked at any time, and for any reason or without providing a reason, by the Settlor. A revocable trust can be a testamentary or living trust.

Irrevocable Trust

An irrevocable trust is one that cannot be modified, terminated, or revoked by the Settlor once the trust is activated. In most states, a court can modify or terminate an irrevocable trust under certain conditions; however, because that requires a court order it is best to consider an irrevocable trust to be one that you cannot change once it is activated. An irrevocable trust is always a living trust.

Constructive Trusts

A constructive trust is an implied trust. An implied trust is established by a court and is determined from certain facts and circumstances. The court may decide that, even though there was never a formal declaration of a trust, there was an intention on the part of the property owner that the property be used for a particular purpose or go to a particular person. While a person may take legal title to property, equitable considerations sometimes require that the equitable title of such property really belongs to someone else.

Asset Protection Trusts

An asset protection trust is typically an irrevocable trust that is designed to protect your assets from claims of future creditors. The trust remains irrevocable for a specific number of years after which time the assets revert to the Settlor if there are no current creditor claims or threats. During the time that the trust is irrevocable, the Settlor cannot be a beneficiary of the trust though for the assets to remain out of the reach of creditors.

Special Needs Trusts

A special needs trust is a specialized trust that allows you to gift assets to a child with special needs without jeopardizing the child’s eligibility for much needed state and federal assistance programs such as Medicaid and/or Food Stamps (TANF).

Charitable Trusts

Charitable trusts benefit organization or the public in general. Charitable lead and charitable remainder trusts combine a charitable and non-charitable beneficiary into one trust. Along with fulfilling a philanthropic goal, charitable trusts are also frequently used to help lower an estate’s exposure to federal gift and estate taxes.

Spendthrift Trust

A spendthrift trust is a trust that is established for a beneficiary, and which does not allow the beneficiary to sell or pledge away interests in the trust. It is protected from the beneficiaries’ creditors, until such time as the trust property is distributed out of the trust and given to the beneficiaries.

Totten Trust

This is the name used for a type of trust created by a “Payable on Death (POD)” (or similar) beneficiary designation on an account. It is, in essence, a revocable trust in which the gift is not completed until the Settlor’s death or an unequivocal act reflecting the gift during the Settlor’s lifetime. The assets held in the account are automatically transferred to the named beneficiary upon the death of the Settlor; however, the beneficiary has no ownership interest in the assets during the lifetime of the Settlor and the Settlor can always revoke the designation up to the time of death.

Contact Indianapolis Trust Attorneys

For more information, please join us for an upcoming FREE seminar. If you have additional questions or concerns about trusts, contact the experienced Indianapolis trust attorneys 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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