submitted by Richard P. Wilson, Esquire
What is it? It is an irrevocable trust funded by the grantor (maker) with his/her property that is likely to produce income or appreciate during the trust term.
The grantor retains the right to receive annuity payments for a period of years (two or three years) generally.
The grantor is treated as the owner of the trust property for income tax purposes.
If the grantor dies before the end of the trust term, the trust property will be included in his or her gross estate for estate tax purposes.
If the grantor survives the term of the trust any remaining trust property will pass to the children without incurring any estate or gift tax.
An ideal time to create this type of trust is when interest rates are exceptionally low, as they are now. Also, at this point there appears to be significant opportunity for assets to increase in value coming out of the pandemic.
Any increase in value will pass to the children when the trust terminates. There is a monthly interest rate which the IRS publishes so that you can use that rate to determine the value of the asset placed in the trust.
Upon termination of the trust, the asset is no longer a part of the grantor’s estate for estate tax purposes.
Given that the federal estate tax exempt amount will probably decrease in the near future, this would be a method to reduce your total gross estate.
Appreciation can also result from the grantor paying income tax on the property being held by the trust. Often times this is a method used to pass business interest to the children as ultimate beneficiaries of the trust.