On behalf of the nation’s community of lawyers, allow me to apologize for all the cryptic acronyms we’ve developed for various kinds of Trusts.
I recently provided you with a kind of “cheat sheet” that explained some basic Trust terminology. This entry is the second installment in that series.
The goal is for you to be able to talk with others about estate planning and asset protection with confidence and without feeling tripped up by complicated legal words or phrases.
The ABCs of QTIPs, ILITs & IDGTs
Lawyers have developed a multitude of trusts to accomplish everything from tax sheltering and gifting to asset protection and passing along family businesses. As complex as their functions can be, these Trusts also carry some pretty complicated names.
Here are the definitions for some of the most common Trusts you might have heard about:
- Qualified Terminable Interest Property (QTIP) – This is a common planning tool that is often used during second marriages to prevent accidental disinheritance of children from a first marriage. A QTIP allows your surviving spouse to benefit from assets held within the Trust, such as continuing to live in your home after you die and receiving income from the assets held in the Trust. No estate taxes are assessed until after your surviving spouse dies. The QTIP postpones estate taxes, but it does not eliminate them. After the death of the surviving spouse, assets in the Trust are distributed according to the Trustmaker’s wishes (i.e. given to a your children).
- Irrevocable Life Insurance Trust (ILIT) – In this kind of planning, a Trust owns the Trustmaker’s life insurance policy. If properly funded, the ILIT protects the policy’s proceeds from the Trustmaker’s Federal Estate Tax burden. These proceeds can be used to pay those taxes or support the beneficiary, usually a spouse or child.
- Intentionally Defective Grantor Trust (IDGT) – This kind of Trust has a really bad name, but it’s a pretty effective way to transfer wealth by which you gift an asset’s appreciation but retain the responsibility to pay tax on its income. Many people use IDGTs as a succession planning tool for a family business. The asset, its appreciation and its accumulating income, without reduction for income taxes, will be passed along to your beneficiaries. You will pay the income tax. The advantage to this Trust is that the asset is removed from your estate and not subject to the Estate Tax. There also is creditor protection for the asset in the trust.
Online Estate Planning Dictionaries
Here are some great resources for Trust term definitions:
- NOLO.com’s online wills and estate planning dictionary.
- FindLaw.com’s online estate planning and probate dictionary.
I hope this article helps you and your family. If you have suggestions for other terms you’d like to see defined, please forward them. As always, if you have a question or concern about a specific case, please contact our office.
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