A family trust is not a specific type of trust but is any trust you create that names your family members by blood, marriage, or law (in the case of adoption) as the beneficiaries — not just your spouse like A-B or ABC Trusts. It can be a living trust or a testamentary trust if it only designates family members as beneficiaries.
This type of trust is created while you’re alive.
The first decision to make is whether or not you need a living trust at this point in your life or ever. You may be too young or not wealthy enough for any of the benefits, such as avoiding probate or estate taxes, to be a consideration at this time. You may be married but have no children, and be able to use less expensive and complicated ways to leave your estate to your spouse such as joint ownership, payable on death accounts, or transfer on death deeds.
Considerations When You Are Choosing Which Type of Living Trust to Create
When a living trust is irrevocable it means after the trust agreement has been formed, signed, and funded you will not be able to revoke (end) the trust or alter any of the existing conditions in the trust. A living trust could become irrevocable if you become unable to manage it while alive and becomes irrevocable when you die.
You can set up an irrevocable living trust right from the beginning. Aside from asset protection and lowering of estate taxes, you may have personal reasons to opt for this such as an illness that may eventually impair your judgement.
You are not allowed to be a trustee of an irrevocable living trust and you will give up rights and control of your property and other assets in it.
You can add assets but unlike a revocable living trust you are not allowed to remove assets, take property back after you’ve put it in, or remove any beneficiaries if circumstances change.
Since you are not legally considered the owner, your assets will be protected from creditors before and after you die. This is sometimes called an asset protection trust (APT), but an APT is a specific trust. How well protected the assets are may depend on your state provisions, although bypassing probate affords some protection as well.
There may be tax advantages.
This does not prevent you from qualifying for Medicaid benefits if you require skilled nursing care. Medicaid has a “look-back” period to past assets, so the timing of the trust’s formation is important.
Setting up the trust to defraud creditors can result in a court declaring the transfer of assets to a trust to be fraudulent and exposure of the trust assets to liability. You could face heavy legal penalties.
There are ways to make changes but they usually need to be part of the initial trust agreement and signed by the trustees and all beneficiaries, including any contingent beneficiaries.
There are options to account for any unforeseen problems with an irrevocable trust that impede its original intent.
Although the trust would still exist If the assets in it were sold or otherwise disposed of, it would be worthless and essentially revoked.
Although most irrevocable trusts can protect your assets from creditors, lawsuits, or any judgments against your estate, an asset protection trust (APT) is set up specifically to do this. These can include cash, securities, limited liability companies (LLCs), business assets, and recreational possessions such as planes and boats. APTs created in the United States have more flexible asset-protection than other irrevocable trusts.
You may want to do this if you are a physician or lawyer and potentially subject to malpractice, you own a business, or are in any other profession or situation that puts you at increased risk for lawsuits or other judgements.
They are expensive and complicated to create, but if done properly the trust may deter potential creditors or plaintiffs from pursuing any action. Make sure you consult a professional skilled in their creation.
An APT is irrevocable; you will not be able to remove any of the assets yourself. You will be designated as a permissible beneficiary and may be allowed access to the assets in the trust through discretionary payments of income and/or principal from the trust if they are approved by the trustee.
There are two basic types of APTs depending on where the trust is located.
Bypass trusts are irrevocable trusts that benefit your surviving spouse by providing income from the trust’s assets and ensure that your children receive their inheritance. Ownership bypasses your spouse and transfers to your children or other familial beneficiaries after the death of your spouse. This is more commonly done with spouses who are not a parent of your children.
There are two ways to create a bypass trust; one is a living trust.
If you and your spouse have an A-B trust, a revocable living trust, the trust is split upon your death. Your spouse’s part, the A trust, is theirs to manage. The family or B trust becomes a by-pass trust that the children eventually receive. The B trust is irrevocable. Your spouse could be the trustee and may have restricted access to the assets. For example, they may be able to get income from the trust for a specified period of time.
Because two trusts are formed at your death and each could contain up to the $11,700,000 estate tax limit, twice the estate tax limit would be tax free. See A-B trust in Trusts for Married Couples section
Credit Shelter Trust
While a credit shelter trust is a bypass trust, it is not a living trust or even a single type of trust but trust options that will provide for your surviving spouse while arranging to have your descendants or adopted children inherit part of your estate. This trust is covered in more detail in the Testamentary Trusts section.
A settlement from a life insurance policy can be subject to estate taxes if it pushes your assets over the federal and/or state maximum. One way to avoid this is to make sure you name a beneficiary for the policy who will receive the settlement after your death. You can make the beneficiary the owner of the policy, but there are a number of potential issues associated with that such as them making changes you won’t want or dying before you.
Another way is to create an insurance trust. An insurance trust is a trust set up to own or hold title to your life insurance policy. It can be done with term or permanent life insurance. This works with both individual and second-to-die life insurance policies which insure two lives, usually spouses, and only pay a death benefit after the second spouse dies.
If you already have a life insurance policy, you can transfer the policy to the trust after it’s been formed.
If you do not have a life insurance policy, you can create the trust and use it to purchase the policy directly.
In addition to the policy, you will need to fund the trust with enough money to pay the premiums.
Once your life insurance policy is in the trust, you will either choose a beneficiary or consider changing them. It is best if you name the trust itself as the beneficiary. This is separate from naming a beneficiary of the trust.
Insurance trusts have additional benefits.
You will usually create your trust as an Irrevocable Life Insurance Trust (ILIT).
Although not recommended, you may opt to create your insurance trust as a revocable trust with you as the trustee.
A Crummey trust, Crummey provisions, or Crummey power, are ways to give gifts that qualify for gift-tax exclusion and still control how the gift is used. This can be especially useful for minor children as an alternative to a Custodial Account (a brokerage or savings account managed by an adult for the children until they reach the age of maturity) since a trust is more flexible and can control when and how beneficiaries can use the assets.
These gifts are in the form of additions to an irrevocable trust.
There are specific actions that need to be taken to make contributions to a trust eligible for gift-tax exclusion.
A qualified personal residence trust (QPRT) allows you as a homeowner to reduce estate taxes by removing the value of your primary and/or secondary house along with the land and all future appreciation from your assets or joint assets with your spouse. You can create two QPRTs if you want to protect both your primary and secondary residence, one for each. Initially, the residence will be in the trust. Once the trust ends your beneficiaries will have ownership and the house stays in your family, although you cannot buy it back.
The process involves creating an irrevocable trust with your children as beneficiaries and funding it by transferring ownership of your property to the trust.
Terms of the trust
You (and your spouse) have the right to live in the house rent free for the “retained income period,” i.e. the specified period of time chosen when the trust was created. This phase needs to be long enough for a financial benefit and short enough to reduce your risk of dying during it.
The house then goes to the designated beneficiaries or a trust in their name. As before, this is usually done by making a new deed with the names of your beneficiaries or their trust. You are now their tenant. This is called the “remainder interest” phase.
You will begin to pay fair market rent if you stay in the house full-time or when you stay there at times.
Rent payments do not count as a gift and therefore do not affect the annual or life-time non-taxable gift limit. This allows you to give additional gifts to your beneficiaries without worrying about additional estate or gift tax.
While this sounds like a good financial plan, there are many factors to consider.
A Miller trust has a single purpose: to allow Medicaid recipients with a gross income over your state’s Medicaid limit to be eligible for long-term care to qualify for nursing home benefits or Home and Community Based Services (HCBS) benefits when you would otherwise be unable to afford them.
Miller trusts are not necessary in states that allow Medicare recipients to qualify for these benefits by spending income over the state’s limit on medically related expenses. While you can do this in Arkansas, Florida, Georgia, Iowa, Kentucky, New Jersey, and Tennessee (minors only), they also allow Miller trusts.
Thirty-two states are “medically needy” or “spend down” states where Miller trusts are not needed to qualify for these benefits if you are unable to afford them.
Medicaid recipients who are over the income plus assets limit can qualify for these services by spending all of these “excess” assets on medical care expenses and other approved items.
Assets counted towards the asset limit are cash and liquid assets easily converted to cash, including:
Assets not counted towards the asset limit include:
Allowable Medicaid spend down items as of September 2020 include:
Each state may have their own name for the program or limit. Medically needy states include Arkansas, California, Connecticut, District of Columbia, Florida, Georgia, Hawaii, Illinois, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Montana, Nebraska, New Hampshire, New Jersey, New York, North Carolina, North Dakota, Pennsylvania, Rhode Island, Tennessee (children and pregnant women), Utah, Vermont, Virginia, Washington, West Virginia, and Wisconsin
Twenty-four states are “categorically needy” or “income cap” states where Miller trusts can be used to qualify for these benefits.
The way a Miller trust works is that any of your income put into the trust is not counted as income.
In order to establish a Miller Trust a trust document is drawn up and a bank account for the trust must be opened.
If you put enough income into the trust to bring your remaining gross income below the limit, typically 300% of the Federal Benefit Rate ($2,382 per month in 2021), you will qualify for these benefits.
Each state that allows Miller trusts has different rules. These rules may include:
There are specific expenses that the trust funds can be used to pay.
Income and interest earned by the trust, if any, can accumulate and will not be counted as a resource.
Aside from the restricted use of the funds, your state must be named as the beneficiary of the trust. If there are any remaining funds after your death, they will go to your state’s Medicaid program.
An alternative is a Pooled Income Trust. This is a type of charity trust created by non-profit organizations for disabled individuals, mainly disabled minors, that allow them to qualify for Medicaid.
Even if you qualify by income, you may have too many resources or assets to qualify for Medicaid. In this case, all states allow you to qualify by putting your assets into a first-party special needs trust.
When a living trust is revocable it simply means that the trust can be revised, closed, or have assets added or taken assets from the trust at any time. If the trust is closed (revoked), your assets are transferred back to you.
There are two or three phases to a revocable trust.
You will continue to use your assets as you normally would have before the trust such as selling, gifting, or otherwise handling and using the property. The only difference is you making transactions in the name of the trustee and not yours.
Most of the time you will be the initial trustee. If you are married, your spouse would be able to be a co-trustee if you have a joint trust.
When you die, it will need to be specified whether your surviving spouse will become the manager of the trust (keeping it revocable) or another trustee is designated (usually making it irrevocable).
A Totten Trust is a revocable living trust that is a type of payable-on-death account. You can easily set one up without a formal written document. However, it can be established as a formal trust by naming a beneficiary on the title document for the account using language such as “In Trust For,” “Payable on Death To” or “As Trustee For.” See the Payable on Death section for more detail.
Since your trust is a dynamic system, it is important to periodically review it and make decisions about the trust based on any changes in your life. As long as you are capable, you are free to alter or close (revoke) the trust whenever you want.
There will be many times when you will need to alter the trust. If you have a joint trust, both of you must agree with the changes. By not updating your trust, some of your assets may end up with an ex-spouse or in probate court when they are not accounted for. You can either amend the trust or completely redo it. This cannot be done by marking the changes on the original document, it must be done with a new document.
You will need to alter the trust:
You may want to close the trust. There are a number of reasons you may choose to do this, such as:
Amending refers to additions to the trust and other minor changes. If the trust document was drafted properly, you will probably not need a separate document to amend your trust if you are simply adding more property or assets.
If you need an official document or have minor changes to your trust, use these steps. Minor changes could include adding a beneficiary due to birth or adoption, adding or removing specific bequests, changing who will serve as successor trustee, or updating a beneficiary’s or the successor trustee’s legal name due to marriage or divorce These are general recommendations because state laws vary on adding amendments to a trust.
Restating your trust involves making a document stating that you are not revoking the original trust agreement but are restating it with some amendments. Restating your trust is preferable if you make anything more than simple changes. It might be better to redo the entire trust if you:
An Amendment and Restatement of Trust is a document that will completely replace and supersede all of the provisions of the original trust. This avoids the confusion that would happen if multiple amendments were added. Title the document, such as “Restatement of the [your name] Revocable Living Trust” dated [original creation date].
There are two options. A document that:
The restatement does not nullify the original trust, but reworks it in a way that allows all of your assets and property to remain in the trust and avoids changing ownership on titles and deeds to a new trust.
You will likely want ran estate planner to help you.
Trust Restatement Forms can be found at Pennyborn,
You can cancel your revocable trust at any time. If it is a joint trust, either of you can decide to revoke the trust. You should consult your estate planner beforehand about what is best for you.
If you decide to terminate the trust for any reasons, you need to put your intent to revoke it in writing using the appropriate document.
Income trusts are an estate planning strategy that transfers assets to family members in a way that can reduce gift or capital gains taxes while providing you an income from the growth of the trust while it exists.
There are three types depending on the duration of the trust and whether or not they are revocable.
Differences Between Income Trusts
Type of trust
You or successor trustee
Duration of income
Until the trust expires
Until the trust expires
No more than you will need to live after the trust expires
No more than you will need to live after the trust expires
Fixed yearly amount
Fixed or flexible amount based on earnings of trust or a percentage of the value of the trust.
Fixed or flexible amount based on earnings of trust or a percentage of the value of the trust.
Income tax payer
Subject to estate tax
Consequences of your death during the trust
Assets go to your beneficiaries
Trust assets return to your estate
Trust assets return to your estate
A private annuity trust can be used for asset protection (estate freeze). It is an agreement in which you (the annuitant) transfer property or assets to another person (the obligor) in return for regular payments to you. This is usually a child or other relative, but could be a coworker you want to leave your business to. This is different from other types of annuities involving financial institutions that will provide income during retirement for turning your assets over to them.
A private annuity trust will exist as long as you are alive, so you can put your entire estate into the trust. You will receive a fixed yearly income based on the probable earnings of the trust until your death. The trust will then be transferred to you beneficiaries.
An annuity is best reserved for assets that will produce capital gains and/or will have significant appreciation over time to allow you to have a good income.
The major goal of the private annuity trust is to defer capital gains, but it can reduce gift taxes for you and estate taxes for your beneficiaries, or obligor if there are no beneficiaries. Although you will need to pay a capital gains tax at the time of transfer, the annuity will have the effect of decreasing further capital gains taxes since the assets, including any growth, are no longer part of your taxable estate.
The value of the asset is the fair market value (FMV) assessed at the time the annuity is created, so you will need an assessor. Assessor’s and other fees, such as legal or accountant fees, can make setting up an annuity expensive.
Because the private annuity essentially makes the transfer a sale rather than a gift, the transfer is not subject to a gift tax. However, this is not true if the value of the annuity is less than the FMV when the difference is considered a gift to the obligor.
After transfer of assets, the obligor agrees to make payments to you based on the terms of the annuity to provide you with an income.
The obligor now owns the asset/property and is free to sell or do anything else with the property. It is better if they keep the asset/property to generate capital gains and interest to afford the payments since the money would come from their estate if they sold it.
The payment amounts should try and match the total of capital gains and interest generated by the assets while you are alive to freeze the value of assets to avoid capital gains taxes when the annuity is sold or transferred to your beneficiaries..
Taxable Income Portion of Annuity Payment = Annual Payment – (Excludable Amount + Gain Amount)
Annual Payment = FMV of Property Transferred ÷ Present Value of Annuity Factor (1 – (1+r)-n/r: r is the expected interest rate and n is the number of years until expected lifetime date)
Gain Amount = (FMV of Property – Property’s Basis [original cost of property]) ÷ Life Expectancy of Annuitant
Excludable Amount = Exclusion Ratio × Annual Payment
If you and your named beneficiaries die before the designated term, the obligor would get the remaining amount and you would not get all of the value and interest (basis) from the property.
If you live beyond your expected lifespan, the annuity and payments would continue to exist and you would get more than your investment in the property. Because you no longer have any basis in the annuity:
You might avoid this with a deferred private annuity, especially if your family history makes you believe this is possible. However, there are disadvantages of this as well.
Once the term of the annuity is over the obligor will control the annuity and will determine the payments. They may become unable or unwilling to make payments. However, any payment amount that is less than the total of capital gains plus interest will increase the value of the annuity and require them to pay capital gains tax
Though not common, joint and survivor annuities are possible. The annuitants are usually spouses and payments continue until the second spouse (survivor) dies. Since there is a chance that the annuity payments will continue for a longer time with a joint annuity, annual payments are generally smaller.
If the obligor sells the assets/property and the present value of the annuity remains equal to the fair market value of the assets, they will avoid capital gains taxes.
If the annuity is transferred to your beneficiaries or a trust in their name, there will be no capital gains tax if the annuity increased in value or estate tax. Your beneficiaries would only pay capital gains tax if they sell the assets and there were capital gains that accrued after your death.
A Grantor Trust is a form of estate freeze that allows you to receive income from the assets and interest earned by the trust for the life of the trust. You pay income taxes on the funds received. Although not required, you can leave a significant amount of assets in the trust to transfer to your beneficiaries after the trust expires without affecting your lifetime gift exclusion or being subject to estate tax.
Unlike a private annuity trust, grantor trusts only exist for a limited time. If the goal is to have the remainder of the trust go to your beneficiaries while you are alive, it is important to make sure the trust expires before you die. You would not want to put your entire estate into the trust, since it would leave you with nothing when it expires.
You will want to put enough assets in the trust that the revenue generated is enough to live off of, but not enough to result in significant gains in the trust that you cannot take advantage of. This would make your family responsible for any capital gains that occurred during the duration of the trust and have to pay capital gains tax on any assets sold.
There are consequences if you die before the trust expires. The assets would no longer have grantor status and become part of your taxable estate and be subject to estate tax. This, plus any professional fees to create and maintain the trust, will reduce the amount of the estate your beneficiaries inherit after your death.
This is the only form of grantor trust that is revocable. As a revocable trust you will be the owner/trustee and manage the assets of the trust, although you should name a successor trustee if you become unable to do this. You will be subject to 26 U.S. IRS Codes § 67-677 and § 2035-2042
When the trust expires any assets remaining either go to the beneficiaries tax-free or stay in the trust to benefit them.
A grantor trust can become irrevocable if you give up control to another trustee.
A grantor trust can be irrevocable. Because the trusts are irrevocable you cannot be the owner/trustee, you can no longer control or reclaim the assets, the assets are protected from creditors, and assets are not subject to estate tax while you are alive or at transfer.
You will still pay income taxes under your own social security number, but the trust will also file a tax return under its own tax identification number (TIN) and pay any taxes associated with income/gains. The Intentionally Defective Grantor Trust is an exception; you pay both the income tax and taxes on any income/gain of the trust.
There are four forms of irrevocable grantor trusts, each providing income in different ways.
In all four forms you have the option of trying to use up the assets or leave some for your beneficiaries (must be family).
A Grantor Retained Unitrust (GRUT) provides you with an income based on a fixed percentage of trust assets each year. The amount will vary based on the annual evaluation of the trust’s worth.
A Grantor Retained Annuity Trust (GRAT) provides a fixed annual income in one of two ways.
An Intentionally Defective Grantor Trust (IDGT) can provide income based on either:
Other aspects specific to an IDGT include:
A Grantor Retained Income Trust (GRIT) provides you with an income based on the net income from the GRIT. A GRIT requires beneficiaries to be nieces, nephews, or other more distant relatives.
Other Differences Among Irrevocable Grantor Trusts
Grantor Retained Trusts – GRUT*, GRAT**, and GRI
Intentionally Defective Grantor Trust (IDGT)
You have no controlling interest in trust-owned assets
You retain controlling interest in trust assets*, but don’t own and can’t reclaim them
Subject to IRS rules defined in the tax code
May or may be totally subject to IRS rules and procedures defined in the tax code
You pay only personal income tax
You pay tax on both your personal income and the trusts income/gains*
Assets require initial appraisal**
Assets don’t require appraisal, but may be challenged by IRS at any time
All assets lose grantor status if you die before trust expires
All assets may not lose grantor status if you die before trust expires
*A GRUT allows you can make additional gifts over time
**A GRAT requires you to pay a tax when the trust is established and requires annual appraisal.
At least 10% of the original trust must be designated as any difference between the determined value of the asset that is greater than the claimed value will be subject to your lifetime gift exclusion.
*Paying taxes on trust income/gains allows you some control of the assets without them being considered part of your estate.
A Qualified Personal Residence Trust is a type of irrevocable grantor trust that only contains your primary or secondary residence. Instead of a steady income, the trust allows you to live in or use the residence rent free for the duration of the trust. Like the assets in the other grantor trusts, the residence goes to your beneficiaries after the trust expires and returns to your estate if you die before then.
To create a revocable living trust you need to have a viable document called a Trust Agreement, Declaration of Trust, Deed of Trust, or Trust Deed. You could begin by filling out a revocable living trust form appropriate for your state, using appropriate software, or going to a professional estate planner. Consult an attorney or other estate planner if you are not completely sure you can do it yourself.
A living trust is not only a document, but a dynamic financial investment that must be actively managed. It can be a laborious undertaking and there are many details to know to make your trust valid.
To have a viable and effective living trust you should transfer and continue to add most of your property and other assets into it before you die.
The transfer methods depend on the asset, but there are two basic ways: reassign ownership rights or change the title/deed.
In each case the ownership should reflect your choice of either the trust itself or the trustee on behalf of the trust.
Real estate such as your home can be transferred using a quitclaim deed. An alternative is a warranty deed which ensures you have good title by pledging or warranting that you own the property free and clear of any outstanding liens, mortgages, or other encumbrances against it. When you transfer the deed, it may make it easier for your trust beneficiaries to sell the home at a later date.
The wording of bank accounts, investments, etc. must be changed so they indicate that they are owned by you or your designated trustee as the trustee of your trust. Instead of [your name], the grantor and trustee, you could indicate ownership as [you or your trustees name], Trustee of the [your name] Living Trust. The official name of your trust should be indicated on deeds, certificates of title, assignment of interest documents, and beneficiary designations.
Other items of personal property (such as your jewelry, antiques, or furniture) can be transferred with an assignment of ownership document and listed on a property schedule.
Most people will not need to deal with these, but other assets that can be transferred into the trust include: business interests, royalties, copyrights, patents, and trademarks, gas, oil, and mineral rights, and accounts receivable.
Any assets not included in the trust can be transferred into the trust at the time of death using a simple pour-over will.
Create Living Trust Forms Online. legalzoom website.