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This primer is meant for instructional purposes only.  It has been created with the intent of providing only a surface-level overview of common trust types for a non-attorney audience.  This primer is not a substitute for proper legal guidance.  The trust arrangements described below should not be attempted without an experienced professional who can provide this counsel. 

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Part Seven: Irrevocable Life Insurance Trusts

Life insurance is one of the most powerful planning tools available.  Whether it is used as a wealth replacement tool, a means to structure the buy-out of a closely-held business, for liquidity to pay death taxes, or just for good old-fashioned peace of mind, life insurance is commonplace in this world—and so too is it commonplace in estate planning.  Everyone should be made aware that most life insurance death benefits are taxable for estate tax purposes, even if the death benefit itself avoids a probate.  This is controversial and sometimes alarming to many people, who were told correctly that their life insurance death benefit was not taxable income to their beneficiaries, but who wrongly thought this meant “completely tax free.”  If a person controls the ability to change the beneficiaries of the policy (or any other “incidents of ownership”), the entire death benefit of the policy will be includable in that person’s taxable estate.  See IRC § 2042.

 

In some cases, people buy life insurance with the expectation that it might pay an estate tax bill.  If the death benefit is taxable, the amount of estate tax liability also goes up.  Life insurance may be powerful, but the benefits expected must be weighed against any increased tax bill incurred by the death benefit.  In a state like Washington, with a low $2,193,000 estate tax exemption, a single life insurance policy alone may be the reason estate taxes are owning at death, and so this problem is exceedingly common here even for individuals well under the federal estate tax exemption.  It is nonetheless possible with good planning to remove the death benefit of life insurance from a person’s estate.  The method most planners use involves a trust vehicle called an irrevocable life insurance trust (ILIT).  This is always irrevocable, nearly always inter-vivos, and generally a grantor trust.[14] An ILIT is a trust which is outside of the grantor’s taxable estate which invests in life insurance on the grantor’s life without the death benefit being taxable in the grantor’s estate when the grantor dies.  A mere beneficiary designation alone will never accomplish the estate tax benefits of a properly structured ILIT.

 

There are two basic types of ILITs.  The first and best type of ILIT is where there is no policy yet in existence, only a desire to create a trust which is allowed to invest in life insurance.  Once the trust is created, the independent trustee (which should never be the grantor) takes some of the initial trust corpus and invests in a life insurance policy on the life of the grantor.  The second way to create an ILIT is more common but not always as successful: a person often wants to place a pre-existing policy into a brand new ILIT.  In these cases, ILIT planning is still viable—but requires the grantor stay alive for at least three years, or else the trust is unwound and the entire death benefit now includable in the taxable estate.  See IRC § 2035(a)(1) and (2).

 

            Paying the Policy’s Annual Premium within an ILIT: Either way an ILIT is created, the original owner no longer has any control over this policy in the trust.  There is now a new ongoing problem, however.  Life insurance typically requires annual premium payments to be made.  There must be a stream of money put into the trust to pay these premiums or the policy will lapse, and the entire set-up will fail.  ILITs require extreme care not just in their set-up, but in how they are structured to receive contributions in each year of the grantor’s remaining life.  In order to make these payments, a grantor has to gift the value of those payments into the trust each year—they cannot pay the premiums directly.  These contributions are taxable gifts, which normally require federal gift tax returns to be filed for every dollar contributed to the trust.  The reader may be aware of a feature known as the gift tax “annual exclusion,” which allows for gifts of up to $17,000 (in 2023) per person without filing a gift tax return.  This applies only to “present interest” gifts—gifts where the beneficiary can fully enjoy the gift immediately, not at some point in the future, like in a trust.  A gift to an ILIT (or to most trusts) is not a present interest gift.  Therefore, the transfer for the payment of life insurance premiums depletes a person’s federal lifetime exemption by every dollar contributed.  If the grantor runs out of available exemption (through either consumption or future law change), there is now a 40% federal gift tax payable on each dollar of new contribution. Sometimes allocating exemption (or eating some tax) is simply the cost of creating a good ILIT.  Other times, however, it can and should be avoided.

 

            Using “Crummey Powers” in an ILIT: Many people want more tax certainty in their ILIT planning, and so desire to avail themselves of the $17,000 per person annual exclusion amount even for gifts to a trust.  As a starting point, we learned gifts to trusts are not eligible for the annual exclusion, but there is a way to make them qualify.  Several decades ago, a person with the last name “Crummey” fought the IRS and won on the argument that a gift to a trust would qualify as a present interest (and so therefore would qualify for the annual exclusion) so long as there was a temporary window of time for the beneficiaries of the trust to withdraw the funds and enjoy them in the present.  That window of time would lapse if not used. 

 

Mr. Crummey won the case, and his success created what are now called “Crummey Powers.”  Crummey Powers allow a grantor to transfer to the trust an amount of funds equal to the gift tax present interest exclusion without consuming any lifetime gift tax exemption (which would otherwise deplete exemption remaining at death).  By contributing funds to the trust and giving each beneficiary the right to withdraw the whole amount for a period of 30 days, the grantor has created a gift which is eligible for the gift tax annual exclusion.  So long as nothing more is gifted each year, the trust continues to receive contributions to pay the premiums (which the trustee will ostensibly use for such a purpose), and the grantor does not consume any available gift tax exemption in the process.

 

There are fatal problems that result from this clever attempt to revive the gift tax annual exclusion and all need to be carefully addressed.  It is not sufficient to contribute $17,000 and have the beneficiary let their withdrawal right lapse.  Federal tax law states that a lapse of a power to withdraw (or, more properly, a “power of appointment”) is a taxable gift to the other beneficiaries—a gift in that case made by the beneficiary holder of the power to the other beneficiaries.  This creates a cascading effect of nasty tax scenarios and so needs to be avoided at all costs.  Thankfully, there is a savings provision within the tax code for this.  A lapse will not be considered a taxable gift so long as the lapse does not exceed the greater of (1) $5,000 or (2) five percent (5%) of the trust’s value.  This is called the “five-and-five” rule. 

 

It is likely that a brand-new policy has very little present value, and so with most new ILITs, $5,000 is the most that can lapse in the first year even if more than $5,000 is contributed.  As the policy grows in value with each passing year and premium payment, there will likely be a year where the trust’s value will be such that five percent is more than a $17,000 annual contribution.  The trust corpus (typically the policy and little else) must be worth at least $340,000 in order for a whole $17,000 contribution (5% of the value) to lapse in that same year.  It is possible to structure these Crummey Powers so that only the largest amount permissible lapses, with any amount not lapsed to be carried over next year unlapsed.  In this way, the increased growth will eventually allow any amount left “hanging” to lapse in subsequent years.  Eventually, five percent should exceed $17,000.  If the contribution to the trust remains at $17,000, the difference will begin to eat into any amount still unlapsed from prior years.  We call these provisions “hanging” Crummey Powers, and they are a frequent additional feature which can be found within ILITs.

 

Please note that using Crummey Powers to take advantage of the present interest gift tax annual exclusion represents only very modest benefit for all the complexity it requires.  Although Crummey Powers are exceedingly common in ILITs, they are not always worth the hassle.  At the end of the day, all that is being done is to preserve $17,000 per year of gift tax exemption by using the annual exclusion rules.  In many cases, ILITs have millions of dollars in value at stake.  Knowing that the annual exclusion is only available once per beneficiary per year, many people who use ILITs deliberately forgo torturing annual exclusions out of Crummey ILITs, and simply gift an equivalent amount to that beneficiary in another, easier form.  Additionally, there can be much certainty and clarity that comes from biting the bullet and making taxable gifts to the trust, filing gift tax returns to allocate exemption.  If a policy’s premium schedule is large enough that it greatly exceeds the annual exclusion(s) available, one would be well advised to at least consider side-stepping these rules altogether by making a simple taxable gift, consuming some exemption, and not using Crummey Powers.

 

            ILITs and Dynasty Planning.  ILITs can ensure that the value of the death benefit flows not just to a person’s children, but for their grandchildren and potentially even further down the line.  Dynastic trusts also attempt, as best they can nowadays, to protect a beneficiary from owing estate taxes on the trust’s value when that beneficiary later dies.  This allows for increased accumulation of wealth over multiple generations without a cascading estate tax consequence at each generation’s death.  In these dynastic plans, the federal government has limited the amount that can be passed in this way since 1986, when Congress introduced the generation-skipping transfer tax (GST tax) which taxes the inherited wealth that would otherwise avoid taxation in the estates of the next generation.  This number is the same as the federal estate tax exemption at $12,920,000 as of 2023.

 

Much like the gift tax annual exclusion, the GST tax also has an annual exclusion available—the same $17,000 amount.  This is meant to ease the minds of grandparents who write a small check to their grandchild of up to this amount: there should not be any gift taxes or generation skipping taxes owing, and no gift tax return is required to document this gift.  When it comes to advanced trust planning, however, and specifically dynastic trust planning using life insurance, federal tax law does not usually allow a GST tax annual exclusion, even when a gift tax annual exclusion might be available under the same facts.

 

Unfortunately, nearly every dynastic ILIT with Crummey Powers will never qualify for the GST tax annual exclusion even if it is properly structured to be eligible for the gift tax annual exclusion.  This is a common point of confusion even among attorneys and accountants.  There are thousands of Americans currently contributing no more than $17,000 a year to their dynastic trust vehicles who think, wrongly, that this contribution falls under the annual exclusion rules for both gift and GST tax purposes.  They are correct for gift tax purposes in many cases but are almost never correct for GST tax purposes.  This means that every single year that a person contributes a dollar to a dynastic ILIT, a gift tax return must be filed, and GST exemption must be allocated—even if no gift tax is actually owing.  CPAs and financial planners should be on the lookout any time they are meeting with a client who has an ILIT that extends beyond one generation.

 

Part Eight: Charitable Trusts 

Charitable trusts are a different variety of trust of vehicle than we have spoken about before.  Most of the advanced trusts in the preceding chapters were irrevocable inter-vivos trusts, usually grantor trusts.  This section will cover certain charitable trusts which can be created both in life or at death—inter-vivos or testamentary trusts.  They can be stand-alone vehicles, or they can be created as part of a larger plan like through a will or RLT.  As such, there is a lot of variety to these types of planning vehicles and so many different ways in which they can be utilized.   

 

As background, there are two taxes that motivate people to make charitable donations: income taxes and estate taxes.  For income tax purposes, a person might want to offset some taxable income in a particular year by using a qualified donation in that same year.  The benefit of this charitable deduction is limited based on a person’s taxable income that year.  Donate “too much” that year and that person gets no additional charitable income tax deduction.  For estate tax purposes, however, there are no limitations on the deduction available like there is for income tax deductibility.  If a person died with a billion dollars and left it all to charity, this unlimited charitable deduction would shield the estate from any estate tax liability on this amount.  Although good charitable planning can create tremendous tax benefits, a person must typically have at least some genuine charitable desire in order for it to be worthwhile.

 

If a person’s intent is wholly charitable—as in, they have a set amount of money they wish to leave to charity for a certain purpose, there are many other vehicles beyond trusts that could be used that are far less cumbersome.  Many charitable institutions offer opportunities to use more limited tools, such as charitable gift annuities (CGAs), or even working with you to create an endowment.  There are new planning opportunities at financial institutions, such as donor advised funds (DAFs).  One of the most popular charitable planning tools has been using Qualified Charitable Distributions (QCDs) of a person’s required minimum distributions (RMDs) within their traditional Individual Retirement Accounts (IRAs).  For those who want to exercise the most control, a private foundation may even be the best option.  If, however, a person wants to maximize the benefit to both their charitable and non-charitable beneficiaries, charitable trusts may be the answer. These are often called “split interest” trusts because they benefit both types of beneficiary.

 

These split interest trusts can be divided into two basic categories, depending on whether the charitable interest is at the beginning (the “lead” interest) or at the end (the “remainder” interest): there are charitable lead trusts (CLTs) and charitable remainder trusts (CRTs).  Each type of split-interest trust is further categorized by whether the lead interest is a fixed annuity stream or a “unitrust” percentage of trust’s value each year.  This gives us four types of charitable split-interest trusts: charitable lead annuity trusts (CLATs), charitable lead unitrusts (CLUTs), charitable remainder annuity trusts (CRATs), and charitable remainder unitrusts (CRUTs). 

 

Each of these four types of split-interest charitable trust allows a person to tailor what they want out of their joint charitable and non-charitable plan.  It is possible for the risk of future gain or loss to be borne by either the charity or the non-charitable beneficiaries.  It is possible, at least for unitrust amounts, to distribute the lessor of a fixed percentage or the actual net income; and likewise possible to distribute a make-up amount in later years to account for any underage in prior years.  Split-interest charitable vehicles have become remarkably flexible tools which maximize benefits between charitable and non-charitable beneficiaries.  In recent years, charitable trusts have expanded in audience due to changes in income tax law for inherited qualified retirement accounts.

Part Nine: Special Needs Trusts

This next type of trust is also possible to create either in life or at death, like the charitable planning trusts discussed above.  Special needs trusts (SNTs) are trusts created for a beneficiary who is receiving (or who may eventually receive) means-tested government benefits on account of a disability or other significant struggle.  SNTs are designed to distribute benefit to that person only to the extent that the individual’s needs are not being met by government assistance.  In this way, a person may continue to receive means-tested government benefits while also encouraging a relative or a loved one to provide some additional benefit at the same time.

 

SNTs come in two basic varieties.  The most common type is a third-party SNT, created by one party for the benefit of a person with special needs or concerns.  This is generally considered the superior type of SNT in most cases it is available and is the one that parents of children with certain substantial disabilities are often encouraged to create under their will or revocable trust.  Third-party SNTs are used in other circumstances too, including between married couples.  Long-term care planning has become prohibitively expensive for many couples, and a life event that renders one spouse unable to properly care for themselves at home can be immensely costly.  Married couples faced with the prospect of long-term care costs consuming all their savings often turn to spousal SNTs, a type of third party SNT usually created under a will following the death of the first spouse for the benefit of the other.[15]  These testamentary third-party SNTs are used in order to protect the portion of the marital assets attributable to the first spouse from counting against the surviving spouse’s eligibility for long-term care benefits.  This helps preserve benefits for the surviving spouse while also allowing a safety net that can be preserved for future needs.

           

Third-party SNTs often bring in other principles described in earlier sections.  They can be beneficiaries of certain trusts described earlier, and some can even function as stand-alone ILITs during the lifetime of the grantor. They can be frequently found in estate plans of all types of families regardless of wealth, size, and sophistication.  Finally, special needs planning tends to work best when coupled with other modern special-needs planning tools, like ABLE accounts.[16]

 

The other type of SNT is the first-party SNT.  A first-party SNT is essential when third-party SNTs are not available.  The original driver of the first-party SNT was an all-too-common situation where a person would become disabled through the fault of another, sue that other person, and then be forced to consume their entire pain-and-suffering award before the government would step in to assist.  In the 1970s, it became apparent that the government was the only entity that benefited from a disabled victim’s efforts in pursuing a civil judgement.  Eventually, the federal government created a type of trust that allowed a disabled person to deposit their own money while not disqualifying them from government benefits.  These trusts are much less powerful and often have more bitter consequences than third-party SNTs, particularly related to reporting compliance and reimbursement requirements following the beneficiary’s death.  They are used with tremendous power, however, in situations which are otherwise often disasters.

Part Ten: Miscellaneous Trusts 

This final part of the primer will deal with a handful of miscellaneous trusts which are common enough to deserve a mention, but do not fall cleanly into other sections.  None of the trusts in this section are closely related or similar to any other trust in this section.

 

(a) Spousal Lifetime Access Trusts (SLATs) 

Spousal lifetime access trusts (SLATS) have become immensely popular after the 2017 Tax Cuts and Jobs Act (TCJA).  As a result of that law, the federal estate tax exemption more than doubled in 2017 from $5,490,000 to $11,180,000 in 2018.  Due to how this bill passed Congress, it had to be budget-neutral within a ten year timeframe.  As written, the 2017 TCJA is scheduled to sunset beginning January 1, 2026 back down to where it was before the TCJA was instituted.  This number is adjusted for inflation over time and is generally expected to be around $7,000,000.  The exemption in 2023 is $12,920,000, which leaves some Americans wondering whether they can avail themselves of this temporary window of time in which estate exemptions are artificially high before they drop back down in 2026.

 

For married couples, it has become common during the last five years to see one spouse gift many millions of dollars into a trust for their spouse’s benefit.  Their goal is to consume their exemption today while it still exists, relying on promises (which are generally believable) from Congress, the US Treasury, and the IRS that they will not “claw back” assets which consume exemption during this time which may disappear in the future if not used.  Couples who use a SLAT also want to make sure that at least one of the two of them does not actually have to part ways with the benefit they received from the asset.  Although it is not generally possible to put an asset into trust to retain a benefit for yourself (see the earlier discussion about IRC § 2036), it is possible for one spouse to put an asset in trust for the other spouse’s benefit.  Married couples who use SLATs do so relying on the assumption that they will be worth more at death than whatever number the exemption will later be.  A SLAT is somewhat similar to the testamentary marital CST discussed in Part Five of this primer, except that a SLAT is an inter-vivos trust created in life.

 

SLATs are exceedingly dangerous, especially in community property states, and more especially still in Washington.  For obvious reasons, the IRS does not look kindly on SLATs.  There are two ways the IRS will often attack them.  First, they will attack mutual SLATs created by each spouse for their respective other, under the principle of “substance-over-form.”  In effect, the married couple was simply benefiting from mirror instruments, and there was no substantive difference which the IRS will respect.  The second way in which SLATs are attacked is of particular concern in Washington and other community property states.  If a spouse is an active part of the creation of a SLAT for their own benefit, they will be deemed the owner of the SLAT for estate tax purposes under the same principle of a retained interest.  In most community property states (but especially in Washington), there are laws which require both spouses’ consent in order to transfer community property.  If one spouse transfers community property into a SLAT, the IRS might well argue (1) the spousal beneficiary must have consented and so will trigger a pull-back into their estate at death; or (2) there was indeed no consent and so the transfer itself was void.  Either argument would be fatal to a SLAT.  Nonetheless, SLATs can be created in community property states by carefully carving out and documenting separate property.  In all cases, however, SLATs (especially those created in community property states) require extra special care.

 

(b) Domestic Asset Protection Trusts (DAPTs) 

Domestic asset protection trusts (DAPTs), sometimes called “self-settled asset protection trusts,” are vehicles designed for creditor protection purposes.  In most cases, they achieve no tax benefit, and in some they can actually increase taxes owing.  The reason people seek DAPTs is so they can retain a benefit from their property while keeping it exempt from any creditor claims that might later appear.  As a hard rule, Washington does not allow DAPTs, and most states do not allow them either.  Washington will generally look for any reason to disallow such a set-up.  A handful of states, however, do offer DAPTs to their citizens.  As a result of the US Constitution’s Full Faith and Credit clause and its Privileges and Immunities clause, as well as the Privileges or Immunities Clause of the Fourteenth Amendment, a state cannot legally prevent its citizens from traveling to and availing themselves of the laws of other states of the US.  Consequently, Washington residents have begun creating DAPTs for themselves in other states even though their own state’s law clearly does not allow such a vehicle to be created in Washington.

 

States such as South Dakota, Nevada, and Alaska have marketed themselves heavily to out-of-state citizens to convince those citizens in other states to avail themselves of more attractive state law features than are available at home.  Although this marketing is often done by attorneys and trust companies that stand to benefit financially from out of state citizens, it does tend to be accurate and based on proper legal foundation.  It is possible for a resident of a state which does not allow DAPTs to avail themselves of the laws of another state which does allow these vehicles.  It is possible still that the law of the person’s home state would be forced to recognize the creditor protection of this trust, even though it was created by their own citizen.  This last point has become a fertile breeding ground for aggrieved states to deny in-state recognition of out-of-state DAPTs, and is likely to expand greatly in scope over the coming decades.  The practical limits of what one state can do to curtail or limit their citizens from using out-of-state laws their home state finds abusive has not yet been well tested in federal courts.

 

As a general rule, DAPTs cannot be used to defraud known creditors.  Even among the states which allow these tools, they tend to disallow creditor protection when the trust was created in anticipation of a known creditor.  DAPTs are also typically irrevocable, meaning that the cost of any putative creditor protection is generally life-long restriction.  Finally, DAPTs are also quite expensive, not just to create, but to administer.  Between heavy out-of-state trustee fees and the potential for escalated income tax consequences, DAPTs are highly sophisticated tools.  In the modern era, they have started to attract US citizens who previously might have tried to hold assets overseas, because trusts which are domiciled in the US generally lack the same strict foreign fiduciary reporting requirements.  Due to these lessened reporting requirements for domestic assets compared to foreign assets, DAPTs have now become a tool ripe for financial abuse.  State and federal governments have begun looking at these tools with more skepticism than ever before.

 

(c) Qualified Subchapter S Trusts/Electing Small Business Trusts (QSSTs/ESBTs) 

Qualified Subchapter S trusts (QSSTs) and electing small business trusts (ESBTs) are features typically found within larger trusts to allow them to qualify for a certain type of business election.  For many different taxation reasons, business owners often wish to make an election on their business interest to treat that entity as an S-Corporation under federal tax law (The “S-Corp election”).  Without going into these myriad business and taxation justifications, it is generally a worthy goal in estate planning that a person’s business or financial plan should not have to needlessly change (usually for the worse), simply because of incapacity or death.  While this goal is sometimes impossible to achieve, it is almost always worth striving for—and no place is that truer than when transitioning closely-held business interest using trusts in life or death.

 

S-Corp elections are highly desirable, and as such should generally be maintained after death if possible.  While the prevailing regulations have little problem preserving an S-Corp election in an estate (by and through a probate at the state level), there are many problems that show up when trusts own businesses which have or may make an S-Corp election.  Consequently, all trusts, whether they be testamentary, inter-vivos, irrevocable, or revocable, should at least consider having QSST or ESBT provisions if there is any substantial risk that (1) business property ends up there and (2) that the business property might require an S-Corp election now or in the future.  Without these provisions, a trust which holds business property over which an S-Corp election has been made might have to undo that election or divest itself of that property altogether.  When the plan involves maintaining closely-held business interest, the question of eligibility for the S-Corp election needs to be considered within the estate plan itself, not just the business plan.

 

Furthermore, American taxation is likely to go through many different changes over the next few decades.  Without predicting what those changes might be, it is certainly possible that new happenings in tax law provide new incentives to make these elections when they would otherwise not be desires today.  QSST/ESBT language is becoming more popular in estate planning just to ensure that a trust can avail itself of opportunities for tax efficiency later on in time.  Although QSST/ESBT language can be lengthy and often feel redundant, business owners should generally consider these clauses alongside the common maxim: “it’s better to have it and not need it than to need it and not have it.”

(d) Individual Retirement Account (IRA) Trusts

For many people, one of their largest assets is their qualified retirement account, such as a 401(k), 403(b), or IRA.  For various reasons, trusts involving qualified retirement accounts tend to involve IRAs, but they can be used for other types of qualified retirement accounts too.  Qualified retirement accounts are treated very differently under the law compared to other assets.  Traditional qualified retirement accounts represent an income tax burden to their beneficiaries.  This is unlike almost every other asset, which has its unrealized income (in these cases, capital gain) erased at death under the step-up in basis rules contained in IRC § 1014.  Traditional qualified retirement accounts are specifically excluded from the step-up in basis and so are one of the only assets which represents a tax bill to the owner’s beneficiaries.  Because traditional qualified retirement accounts defer ordinary income (in spite of being invested in capital assets and bearing that same risk), they are not capital assets and have no “basis” to step up.  The income tax bill on a stock within a qualified retirement account is still owing after death in a way that unrealized gain in life on a stock outside a qualified retirement account is not. 

 

Qualified retirement accounts almost always move by their beneficiary designations.  They are required by law to be in an individual owner’s name, and so cannot be transferred during life without realizing the entire pent-up income tax bill in the year of transfer.  This consequence alone is usually all that is required for someone to want to use a beneficiary designation.  At death, the income tax consequences will vary depending on who that named beneficiary is.  Under pre-2020 law, it was possible for most beneficiaries to stretch the income tax consequences over the course of their remaining lifespan, in effect realizing income in more years, diluting the tax burden, while also letting the pre-tax value grow for longer.  The law changed beginning January of 2020, allowing most non-spouse beneficiaries a maximum of only ten years (and in many cases only five).

Trusts have long been used for IRA planning, but these recent law changes have required more need for caution and expertise.  In a typical scenario, a person would name a trust rather than their spouse as the beneficiary of their IRA.  They would do this for a variety of reasons, but one of the most common is when handling a blended family scenario.  In these cases, it is common that the predeceased spouse wants to provide for their surviving spouse while having some certainty that the predeceased spouse’s children will eventually benefit after the surviving spouse passes away.  This suggests a trust.  Even before the law changes, trusts received worse income tax deferral treatment than spouses, and so it was strongly encouraged to create the trust with income tax efficiency as a priority.  After the 2020 law changes, these tools have been precarious to rely upon, and new law and regulations are currently being created for to give more clarity on managing qualified retirement account which designate trusts as beneficiaries.

 

Qualified retirement account owners who have a large amount of net worth in their qualified accounts and who also have children from prior relationships are now in an unenviable position after the recent law change.  In many cases, the income tax benefits of naming a spouse outright come with risk to the children from a prior relationship.  On the other hand, utilizing sophisticated planning tools for qualified retirement accounts could end up causing a higher income tax liability with no guarantee of success.  In any case, it is expected that Congress and the US Treasury will soon finalize the law and regulations related to inherited qualified retirement accounts so that owners can have some certainty in their estate planning.

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[14] ILITs do not have to be grantor trusts, but they frequently are made so in order to manage income tax consequences inherent within many insurance policies.  These income tax concerns are often helped by using grantor trust provisions.

[15] In Washington, Medicaid’s long-term care benefits are administered by the Washington Department of Social and Health Services (DSHS).  DSHS has long maintained the position that they will only recognize testamentary third-party SNTs created for a spouse if the SNT is created under a will—in other words, through probate.  Washington is not the only state whose Medicaid agency takes this position.

[16] ABLE accounts are specialized accounts allowed under federal law as of 2014.  They permit an eligible beneficiary to maintain up to $100,000 within this account while still preserving eligibility for means-tested government benefits, and this function exists wholly separate of any SNT which may or may not be in existence.

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