People often restrict gifts by placing them in trusts in order to control use, maximize value or provide creditor protection. Trusts can be funded with a variety of assets, from homes to life insurance to shares in family limited partnerships. As new laws have made gifts more attractive, here is a guide to commonly used trusts.
—Anne Tergesen
STRATEGY: Charitable Lead Annuity Trust
* DESCRIPTION: These can be set up in life or at death; they make annual income payments to charity for a set term. The remainder goes to heirs. Tax treatment depends on whether the donor claims a charitable deduction; low current interest rates help donors reduce gift taxes. RISK RATING: Green
STRATEGY: Credit-Shelter Trust
* DESCRIPTION: A couple sets up one for each spouse, ensuring that heirs benefit from the full estate-tax exemption for both partners. Under pre-2010 law, if a surviving spouse inherited all the partner's assets outright, the heirs could lose the benefit of the first spouse's exemption without a creditshelter trust. They can still make sense under current law. RISK RATING: Green
STRATEGY: Dynasty Trust
* DESCRIPTION: Twenty-eight states plus Washington, D.C., permit irrevocable trusts with in-state trustees to endure for generations, and perhaps forever. If structured properly, such trusts can avoid estate or generation-skipping taxes. RISK RATING: Green
STRATEGY: Grantor Retained Annuity Trust
* DESCRIPTION: Over a preset term, these return principal to the giver. If the asset appreciates, the trust pays the donor a preset interest payment; extra appreciation is tax-free to beneficiaries. GRATs are appropriate for donors who don't want to part with principal or those who want to transfer more than their individual exemption, as they can be structured with no gift-tax consequences. RISK RATING: Green
STRATEGY: Grantor Trust
* DESCRIPTION: Grantor trusts allow donors to pay capital gains and income taxes on investments in the trust on behalf of beneficiaries. Because the IRS doesn't consider these payments a gift, they can be a good way to transfer wealth. RISK RATING: Green
STRATEGY: Qualified Personal Residence Trust
* DESCRIPTION: Donors may give a home to beneficiaries at a discount to current market value and also transfer future appreciation free of taxes. The donor remains the home's owner for the trust's term. After that he or she must move or pay rent, which can be another way to give more to heirs. RISK RATING: Green
STRATEGY: Qualified Terminable Interest Property Trust
* DESCRIPTION: Often used by those with children from a prior marriage, these trusts provide a surviving spouse with income, and sometimes principal, free of estate tax. The donor retains control over who inherits the remaining assets after the survivor dies; those assets are then subject to estate tax. RISK RATING: Green
STRATEGY: Sale to an Intentionally Defective Grantor Trust
* DESCRIPTION: A way to transfer more than $5 million per individual to heirs. The donor starts a trust with a gift and then lends it up to 10 times more to buy an asset. As long as the asset appreciates, the trust can cover the loan, with what is left going to the beneficiaries. Risk: not explicitly allowed by the tax code, and the IRS sometimes challenges them. RISK RATING: Yellow
STRATEGY: Spousal-Access Trust
* DESCRIPTION: Some planners advise those who are worried about making irrevocable gifts to name a spouse as beneficiary, in addition to other heirs. Risks: divorce; trustee denial of spousal payouts; and IRS scrutiny if spousal payments are too predictable. RISK RATING: Yellow
STRATEGY: Self-Settled Trust
* DESCRIPTION: These provide trustees the discretion to distribute assets to the donor. If properly structured and located in a favorable jurisdiction, the trust can be excluded from the donor's estate, says Jonathan Blattmachr, director of estate planning for the Alaska Trust Co. Risk: The sole authority is a nonbinding IRS letter ruling. RISK RATING: Red
Source: WSJ research
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