Trusts involve three positions: The Grantor, or Settlor who creates the trust; the Trustee, who manages the trust, and the beneficiary who receives benefit of the trust. Although a legal relationship, the trust or estate is viewed as a separate taxpayer and can involve tax implications at both the entity and beneficiary level.
Definition of a Trust. To describe a trust, it is a conveyance of property in which legal title is given to a trustee and equitable title is given to a beneficiary. The trustee, or legal title holder, is under an obligation to maintain or distribute trust property for the benefit of the beneficiary according to the terms of the trust. Such a division of title can serve a number of purposes: it can protect a beneficiary's assets from the beneficiary's own poor judgment or from the beneficiary's creditors by vesting control of distributions in another person; it serves as a vehicle to minimize estate and generation skipping transfer taxes; it is a way of providing for family members with special needs or for pets long after their now living caregivers are gone; and it can act as a vehicle to safeguard and grow assets for generations to come. Trusts have historically been used by the very wealthy. However, their use as an estate planning tool has expanded as the jurisdiction, like Wyoming, in which a trust is created established the governing law.
The Code. The Uniform Trust Code was approved in 2000 and was the first comprehensive act on trusts in the United States. A general need for guidance in an era of increased interest in trust creation prompted its drafting. Wyoming adopted the Uniform Trust Code and because of its added creditor protection, increased flexibility and provisions for trust protectors. Wyoming made over 100 substantive changes which has resulted in an especially settlor friendly code.
Taxes. The Internal Revenue Code has been structured so that makers of trusts are allowed to take advantage of a number of estate and income tax minimization techniques, which protect the assets in a trust and allow for its unencumbered growth.
Top Ranking for Trusts. Wyoming consistently ranks in the top 5 states in the United States to make, move or repurpose a trust. The reasons for having a trust in Wyoming also help describe what a trust is:
1. Near perpetual trusts capable of avoiding transfer taxes for up to 1000 years.
2. No income tax, and a very low probability of an income tax ever being created.
3. Privacy, including no registry requirements and limited liability company protection.
4. An enhanced version of the Uniform Trust Code that allows:
- flexible trust modification and reformation
- prudent investor standard
- trust advisors and special purpose entities
- nonjudicial settlement agreements
- directed trusts including domestic asset protection trusts
- easy trust migration and reformation
- possible common law decanting
- enhanced protection using a limited liability company whose sole remedy is a charging order and excludes a judicial foreclosure remedy
- private trust companies that are nonregulated but available regulation if desire
- self settled spendthrift trusts allows settlors to retainer inter vivos, special or general powers of appointment
- protection of discretionary and mandatory distributions
- charging order as sole remedy against limited liability company, the owner of which can be an asset protection trust or the trustee of a private trust company
- consistently trust friendly and responsive legislature
- fast and efficient court system
More Tax Considerations and Generation Skipping Transfer Tax.
Since the time of Henry VIII in England, the common law in this country guards against holding a family's assets in a perpetual trust for more than 21 years measured by a current life. However, in 1976 Congress adopted the generation skipping transfer (GST) tax, which limited a duration of a trust to ninety years or the duration of the 21 year Rule Against Perpetuities, whichever is greater. The generation skipping transfer tax was created to prevent one or more generations from escaping gift or estate tax as property passed to them. The tax is imposed when a taxable event occurs that passes property through a trust or otherwise to a person younger by two generations or more than the person making the transfer. In other words, the IRS wants to make sure that when one person transfers a gift to another person, no matter the generation, that transfer is taxed.
However, in 1986 Congress amended this tax to allow individuals to transfer a certain dollar amount at death without paying transfer taxes. By funding a trust with the exempt amount, future generations will benefit from the trust's appreciation free of any transfer tax. Because of that, many states, including Wyoming, abolished their guard against the limit on perpetual trusts. What this means is that in Wyoming, a properly formed trust exists outside the federal transfer tax system so that during the trust's life, gift and estate taxes do not apply and control of the trust assets stay in the hands of those named by the settlor and future beneficiaries.
Wyoming's 1000 Year Limit on Multigenerational Trusts. Wyoming has adopted a 1000 year limited on multigenerational trusts, which means that a valid trust in Wyoming must vest, or be owned by an individual, within 1000 years. The reasons for establishing that type of trust include avoiding the generation skipping transfer tax as discussed above, and keeping land and other assets in the family.
Reasons for Repurposing a Trust. In recent years, the use of trusts has increased dramatically. As times passes, tax provisions change, people move, family and beneficiary needs change and the trust as drafted fails to address the current or long term needs for the beneficiary or for trust administration.
Some of the reasons for a trust to be changed or updated are: (1) modernize trust provisions; (2) change trust situs or governing law; (3) change trust administrative terms; (4) divide or merge trusts (5) reduce administrative costs; (6) grant or limit power of appointment; (7) limit the beneficiary's right to receive information; (8) eliminate a beneficiary (9) move to a jurisdiction that provides asset protection (10) change from pot trust to separate shares (11) transfer assets to a special needs trust (12) address changes in beneficiary circumstances. Examples of beneficiary changes are creditor, health, marital, substance abuse or unproductive beneficiary.
There is more than one way to change a the trust including: (1) exercise of general trust powers (2) nonjudicial modification (3) judicial modification and (4) decanting.
There are some situations that dictate the need to modify irrevocable trusts including: (1) the beneficiary needs to qualify for government benefits (2) to obtain a step up in basis (3) to change distribution terms (4) to minimize income taxes (5) to aid with upstream planning.
Here is a link to "How do I know if I need to change or repurpose my trust".