Specialized Trust Mechanisms
Conventional living trusts are immensely adaptable to clients' intentions, but sometimes we recommend different or supplemental drafting approaches. Examples of specialized trust approaches include:
Life Insurance Trust
A life insurance trust may be helpful to create separate bequests following divorce and/or remarriage or to reduce federal estate taxes on an especially large estate.
Charitable Remainder Trust
A charitable remainder trust can be used to give part of a donor's estate to charity eventually, but only after it has provided support for one or more beneficiaries who survive the donor. In a charitable remainder trust, beneficiaries are designated to receive income from the trust for a specific period of time, or possibly their whole lives. The remaining assets in the trust then pass to the named charity. A charitable remainder trust may allow the trust's creator to reduce exposure to estate tax and to obtain an income tax deduction for the gift to charity.
Qualified Domestic Trust (QDOT)
This is a type of trust used to keep asset management in the hands of U.S. citizen friends and family, primarily for tax reasons, in case the surviving spouse of a married couple is not a U.S. citizen. A QDOT provision can make it possible to defer federal estate tax until the death of the non-citizen surviving spouse.
managing assets for minors
Transfers to minors through a trust may reduce the estate taxes of a donor by eliminating future appreciation of a gift that would otherwise be given through the donor’s estate. Trusts for minors allow for prolonged management of assets until a young person is old enough to receive all or part of them in the opinion of the donor — which may be partway into adulthood. Depending on the wishes of the settlor, the duration of asset management and the distribution amounts will vary. Trusts often include provisions to create a subtrust for each beneficiary who is younger than a specified age at the time of the original trustor’s death. Subtrusts can also be designed for beneficiaries who have debts or trouble handling finances. (The California Uniform Transfers to Minors Act (CUTMA) custodian process is a non-trust approach that is simpler but less flexible.)
Special Needs Trusts
Special needs trusts are intended to help a disabled or aged beneficiary of a trust to continue receiving government benefits such as Supplemental Security Income (SSI) or Medi-Cal while also receiving in-kind help from a trust at the trustee’s discretion. A special needs trust can be especially helpful when the most urgently needed benefits are likely to be those covering medical and/or attendant care at a cost that a family’s savings could not replace.
Qualified Terminable Interest Property (QTIP) Trust
Qualified Terminable Interest Property (QTIP) Trusts provide another way for married couples to take advantage of provisions in federal estate tax law. A QTIP trust pays income from the trust to the surviving spouse for his or her lifetime. During the surviving spouse’s lifetime, he or she is the only person who may receive distributions from the trust. The executor of the deceased spouse’s estate must decide whether to pay estate taxes at the time of death of the deceased spouse or defer them, so that they will be paid by the estate at the death of the surviving spouse.
Qualified Personal Residence Trust (QPRT)
A QPRT is an irrevocable trust in which the settlor retains an interest in a personal residence or vacation property for a term of years. The remaining interest in the property passes to one or more beneficiaries. The settlor retains ownership of the real property until the term expires or until he or she passes away. Especially since the passage of Prop. 19, which took effect in February 2021, the California property tax implications of this trust type should be reviewed with great caution, especially with respect to parent-child gifts or inheritances.