Abstract: A parent or grandparent has many tax and nontax reasons to make lifetime gifts to a minor child or grandchild. Tax-related motivation for many transfers includes estate tax and income tax savings. A common nontax reason is to provide for the minor’s college education, support and maintenance in the event of any future family adversity. Another desire: To provide for a smooth and orderly transfer of family business control. This article explores options for initiating a gifting strategy.
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The acronyms translator Trusts you should know about
Every industry has its language shortcuts to express common terms, techniques or principles. In connection with planning and structuring trusts, estate planners also use acronyms and coined phrases. Here are just a few of the acronyms used to describe commonly encountered trusts:
APT. The asset protection trust is used to shelter real and personal property from the reach of future creditors, including marital claims. If a trust is created in the United States, it is referred to as a domestic asset protection trust (DAPT); if an offshore jurisdiction is used, the trust is an offshore asset protection trust (OAPT).
CLT. The charitable lead trust is established for a set term to benefit a charity and family members. The charity receives distributions during the term and, at term’s end, the balance passes to the heirs.
CRT. A charitable remainder trust is created for a term not to exceed 20 years or for the recipient’s lifetime. The donor or other recipient receives annual distributions during the term, with the balance passing to charity at term’s end. A charitable remainder trust is the reverse of the charitable lead trust.
GRT (also GRAT, GRUT and GRIT). With a grantor retained trust, the grantor retains an interest in the trust for a certain term or until his or her death. The grantor can retain a predetermined annual payment (a grantor retained annuity trust, or GRAT) or a payment of a specified percentage of the trust’s annual value (a grantor retained unitrust, or a GRUT). If the grantor retains only the right to receive income for the term, that is a grantor retained income trust (GRIT).
GST Trust. A generation-skipping transfer tax-exempt trust is an irrevocable trust designed to provide income for the life of a child, while preventing the assets from being taxed to the child’s estate.
ILIT. The irrevocable life insurance trust owns, and is the beneficiary of, life insurance on the grantor or on both the grantor and the grantor’s spouse. Proceeds are excluded for estate tax purposes from the grantor’s and spouse’s gross estates, except in certain limited circumstances.
QDOT. By using a qualified domestic trust, transfers for a noncitizen spouse’s benefit can qualify for the estate tax marital deduction.
QPRT. With the qualified personal residence trust, a personal residence or vacation home is transferred into the trust for a term, removing the appreciated remainder interest from the transferor’s estate for estate tax purposes. During the trust term, the transferor resides in the residence.
QSST. The qualified subchapter S trust is a nongrantor trust designed to qualify as an S corporation shareholder. Only individuals and certain trusts are permissible S corporation shareholders.
QTIP. The qualified terminable interest property trust qualifies for the gift tax or estate tax marital deduction. To qualify for the marital deduction, the spouse must be entitled to receive all trust income each year, and the spouse cannot possess a general power of appointment over the trust property.
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