TESTAMENTARY TRUST
These trusts can have many names including: Bypass Trust, Family Trust, Children's Trust, Residuary Trust or QTIP (Second Marriage Trust). Testamentary Trusts are typically created to provide support for surviving spouses, children or family groups.
Bypass trust (also called an AB trust or a credit shelter trust) is a tool used by well-off married individuals to legally maximize their estate tax exemptions.
Trusts can be broadly categorized into four main types: Living Trusts, Testamentary Trusts, Revocable Trusts, and Irrevocable Trusts. There are many different types of trusts you can choose from, and understanding how they are different can help you pick the right one for your needs.
A bypass trust is designed to be irrevocable. Beneficiaries - A bypass trust names residual beneficiaries in addition to the surviving spouse. A survivor's trust only names the surviving spouse. Duration - A bypass trust can extend beyond the surviving spouse's lifetime.
A major disadvantage of a bypass trust is the loss of the second income tax basis step up at the death of the surviving spouse for the assets in the bypass trust. When someone dies, the capital basis of the person's assets, with certain exceptions, is adjusted to the fair market value at the person's date of death.
Grantor – A person, including a testator, who creates, or contributes property to, a trust.
Irrevocable trusts
This can give you greater protection from creditors and estate taxes. As stated above, you can set up your will or revocable trust to automatically create irrevocable trusts at the time of your death. When you use your will to create irrevocable trusts, it's called a testamentary trust.
Selecting the wrong trustee is easily the biggest blunder parents can make when setting up a trust fund. As estate planning attorneys, we've seen first-hand how this critical error undermines so many parents' good intentions.
Still, the real purpose of a Bypass Trust comes into play when the second spouse passes away. At the time of the second spouse's death, assets won't be included in the taxable estate. As a result, the assets may be passed on to named beneficiaries without incurring significant estate taxes.
The Residuary Trust will initially receive the tax exempt portion of your estate for the benefit of your surviving spouse and descendants. Unlike the Marital Trust, the Residuary Trust can provide for substantial flexibility and give broader discretion to the Trustee.
If you fail to fund the Bypass trust or do so late, the IRS may assess penalties, taxes, and interest.
As a result, a (non-grantor) bypass trust will typically file its own Form 1041 income tax return, reporting its own income (i.e., from the portfolio and other assets that it holds), claiming its own deductions, and paying its own trust tax bill.
When drafting a will, individuals designate one or more residuary beneficiaries. They receive the remaining estate portion. Specifying these beneficiaries reduces ambiguity and honors the testator's intentions.
The Bypass Trust can be modified during the surviving spouse's life despite the fact that the Trust is otherwise irrevocable. To do so, all of the beneficiaries must agree to the changes.
An irrevocable trust could be a good option for people 65 and older who are Medicaid-eligible because it protects the elderly individual from having to dispose of their assets in order to qualify for Medicaid or nursing home care.
There are a variety of assets that you cannot or should not place in a living trust. These include: Retirement accounts. Accounts such as a 401(k), IRA, 403(b) and certain qualified annuities should not be transferred into your living trust.
A Trust is preferred over a Will because it is quick. Example: When your parents were to pass away, If they have a trust, all the Trustee needs to do is review the terms of the Trust. It will give you instructions on how they distribute the assets that are in the Trust. Then they can make the distribution.
A Living Trust can help avoid or reduce estate taxes, gift taxes and income taxes, too.
WHO IS THE “RIGHT” TRUSTEE? A natural first inclination is to consider a family member or trusted friend who knows you and your philosophies and values well. Family or friends may personally know your beneficiaries and their needs.
A revocable trust doesn't protect assets from a nursing home because it gives the grantor ownership of the assets. Instead, an irrevocable trust (specifically in the form of a MAPT) can protect your wealth from nursing homes and clear the way for you to receive Medicaid assistance.
A residuary trust, sometimes called a “bypass trust” is a separate legal document that is paired with a pour-over Will and is often used by married couples to avoid or minimize estate taxes. Here's how it works. When the first spouse of the couple dies, his or her estate assets are divided up into two separate trusts.
While executors have discretion in some areas, your core decision-making is bounded by: The deceased's will. You must follow their distribution wishes rather than diverging based on your own judgments.
Orman was quick to defend living revocable trusts in her response to the caller. “There is no downside of having a living revocable trust. There are many, many upsides to it,” she said. “You say you have a power of attorney that allows your beneficiaries, if you become incapacitated, to buy or sell real estate.