Irrevocable Trust Situs Question

[help_me_learn]

I need to create an irrevocable trust.
I live in Connecticut. All my beneficiaries live in NY. The main trustee works in NY, but lives in PA. The contingent trustee lives in NY.

I learned that Connecticut Trust Law changed last year making it an appealing option. Do any of the changes apply to the type of trust I need to set up?

One of my beneficiaries receives Supplementary Security Income and I want to make it such that the trustee had the discretion on how to distribute both principal and income so as to make sure that particular beneficiary does not lose his benefits.

Also, I want to be able to add money to the trust should I choose to in the future.

Which state is best to form this trust - CT, NY, or PA?

Are there any special provisions or clauses I should make sure are in the trust to make sure the trustee has discretion to

1) To treat capital gains as income and distribute it as he sees fit or yearly
2) I have the option of adding money to the trust
3) Protect the beneficiaries from their creditors

Thank you

 

[Zigner]

Your question is very broad. You should speak to a local estate planning pro.

 

[zddoodah]

I need to create an irrevocable trust.

Why do you need to create an irrevocable trust?

I learned that Connecticut Trust Law changed last year making it an appealing option.

Learned from whom? Appealing in what way?

Do any of the changes apply to the type of trust I need to set up?

That's an excellent question for a Connecticut trust attorney and a poor question for anonymous strangers on the internet, most of whom are not lawyers and (to the best of my knowledge) none of whom are in Connecticut. We certainly can google, but so can you.

Which state is best to form this trust - CT, NY, or PA?

There is no conceivable way to get a reliable opinion about this from anonymous strangers on the internet (especially when those strangers know nothing at all about you or any of your intended beneficiaries or why you want to create a trust -- much less an irrevocable trust).

Are there any special provisions or clauses I should make sure are in the trust to make sure the trustee has discretion to

1) To treat capital gains as income and distribute it as he sees fit or yearly
2) I have the option of adding money to the trust
3) Protect the beneficiaries from their creditors

#2 obviously isn't a trustee discretion issue, and #1 involves a matter of tax law (although there may be elections that the trustee can make). #3 is beyond vague. But yes, you could put provisions in the trust that touch on each of these things.

 

[ALawyer]

Given the potential for state estate and/or inheritance taxes, plus a potential desire for asset protection, you may want to think well beyond the borders of the 3 states you currently have in mind. What makes sense largely depends on the size of your expected estate, the levels of flexibility and protection you want and the beneficiaries may need, and the tax consequences, as a properly constructed estate plan can use a properly established and funded trust -- and that trust can be established under the laws of almost almost anywhere.

 

[help_me_learn]

The amount of the trust is only $20,000 so I obviously cannot afford to spend $1000 or so to set this up and have to do it by myself using online forms or affordable software.

The reason I need to create an irrevocable trust is so that I don't have to worry about paying taxes on the gain and also as a way to gift the money to the beneficiaries over time. I will have my trustee friend manage the money. He has managed my cousin's money in his account for 30 years. I can just gift the money to them piece meal, but then I won't be able to make this money grow by having my trustee manage it by buying and selling stocks, bonds, and mutual funds.

I learned from google that Connecticut Trust Law Changed.

Are any online templates I can use to set this up myself better than others or is there any software I can use?

I understand that lawyers are trying to make money, but I just cannot afford to pay at this time.

I found so many forms online and know people who used these templates, but not sure which ones I should use.

The 2 main points for me in creating this trust is so that I can add money to it in future years, if I choose to, and
so that all capital gains income is treated as distributed income and distributed to beneficiaries yearly.

I have consulted with 3 estate and trust attorneys already and all 3 said that its not possible to attribute short term capital gains to income and that it becomes part of the principal. I started reading articles online and when I showed these articles to these attorneys all 3 backtracked, saying it is possible.

The reason I am on this forum is because I thought there are people here who did this by themselves before and could offer help.

Thanks

 

[Taxing Matters]

The amount of the trust is only $20,000 so I obviously cannot afford to spend $1000 or so to set this up and have to do it by myself using online forms or affordable software.

The reason I need to create an irrevocable trust is so that I don't have to worry about paying taxes on the gain and also as a way to gift the money to the beneficiaries over time.

You don't entirely avoid income tax on the gain with an irrevocable trust. Instead, what happens is that either the trust or the trust beneficiaries are taxed on the income of the trust, including the gain on investments. If the trust pays the tax then usually the tax is more than if the beneficiaries because trusts have a more progressive tax rate schedule than individuals and don't get the standard deduction that individuals get, either.

Moreover, with an irrevocable trust when you die the assets in the trust will not get the adjustment to basis to fair market value (FMV). Assuming that the assets increase over time, that adjustment at death would have the effect of wiping the gain that had built up in those assets. But you don't get that step up in basis with an irrevocable trust unless that trust qualifies as a grantor trust under the Internal Revenue Code (IRC).

The revocable trust is by far the most common grantor trust used today because it provides the trust creators with the maximum flexibility in their estate plans. You can make a revocable trust a grantor trust by reserving certain powers to yourself in the trust, but in most cases if you are going to do that then you may as well make it a revocable trust. Only a limited number of people would need a irrevocable grantor trust.

I will have my trustee friend manage the money. He has managed my cousin's money in his account for 30 years. I can just gift the money to them piece meal, but then I won't be able to make this money grow by having my trustee manage it by buying and selling stocks, bonds, and mutual funds.

That can be done with a revocable trust, too.

The 2 main points for me in creating this trust is so that I can add money to it in future years, if I choose to, and so that all capital gains income is treated as distributed income and distributed to beneficiaries yearly.

The former you can do with an revocable trust, too. The latter requires an irrevocable trust that is NOT a grantor trust. But by doing that you give up the step up in basis that you would get with a grantor trust (which includes revocable trusts and irrevocable trusts in which you retain certain specific powers). So if you want that step up in basis you'll have to pay the income tax on the trust income while you are alive.

I have consulted with 3 estate and trust attorneys already and all 3 said that its not possible to attribute short term capital gains to income and that it becomes part of the principal. I started reading articles online and when I showed these articles to these attorneys all 3 backtracked, saying it is possible.

You can do that unless your goal is create certain kinds of trusts where the rules require a very specific allocation to income and principal. Most of those involve either planning to avoid estate taxes (and currently unless your estate is expected to be at least $5 million or more your estate won't have estate tax to pay) or planning to preserve certain benefits that a beneficiary is receiving, like Medicaid, SSI, food stamps, and other similar government benefits for example.

 

[help_me_learn]

Taxing Matters,
Thank you for taking the time to answer my question.

Based on your answers it appears that I need to create a non-grantor irrevocable trust, but to make sure I have a few more questions and want to go over a few examples to see if that is correct.

Moreover, with an irrevocable trust when you die the assets in the trust will not get the adjustment to basis to fair market value (FMV). Assuming that the assets increase over time, that adjustment at death would have the effect of wiping the gain that had built up in those assets. But you don't get that step up in basis with an irrevocable trust unless that trust qualifies as a grantor trust under the Internal Revenue Code (IRC).

So for example, in year one the trustee makes 10 trades for a net profit of $10,000
$2,600 remains in the trust and the trust is not taxed at all.
$7,600 is distributed equally to three beneficiaries ($2,533.33 each)

Since one of the beneficiaries has carryover losses totaling $50,000 - he will pay no income tax on the gain.

The other two beneficiaries are in the 12% tax bracket and will pay 12% of $2,533.33 each.

Or he may choose to distribute all of the income to the first beneficiary so as to avoid income tax due to carryover losses.

Now since the beneficiary with the carryover losses receives SSI, he will not receive benefits for the month in which the distribution is made as it will be counted as unearned income and/or it exceeds the asset limit.

Is there anything in this example that will make grantor irrevocable trust better than a non-grantor irrevocable trust?

The revocable trust is by far the most common grantor trust used today because it provides the trust creators with the maximum flexibility in their estate plans. You can make a revocable trust a grantor trust by reserving certain powers to yourself in the trust, but in most cases if you are going to do that then you may as well make it a revocable trust. Only a limited number of people would need a irrevocable grantor trust.

Yes, but doesn't it also open the assets up for any potential lawsuits I might have and doesn't shield the assets from my potential creditors as an irrevocable trust would?

The former you can do with an revocable trust, too. The latter requires an irrevocable trust that is NOT a grantor trust. But by doing that you give up the step up in basis that you would get with a grantor trust (which includes revocable trusts and irrevocable trusts in which you retain certain specific powers). So if you want that step up in basis you'll have to pay the income tax on the trust income while you are alive.

How does giving up stepped up cost basis less advantageous in an irrevocable trust when the only income is short term capital gains?

Would it be any different if any income was long term capital gains but for stocks purchased in the trust, not transferred to it?

One of my main concerns is to make sure the SSI receiving beneficiary does not lose his benefits, but can also take advantage of his capital loss carryovers, so he doesn't have to pay tax up to that amount.

Now, say in 10 years I decide to add another $20,000 to the trust and at this time the trust will have $66,600 (Initial $20,000 + $2,600 retained every year tax free + my additional $20,000) and I happen to die that year,

is the trustee obligated to distribute all this money including all the income that's generated during the year
by the end of that year? And will this amount be taxed at the beneficiary level considering it will be a non-grantor irrevocable trust?

Thank you