Webinar Transcript (10/31/2024): “To Trust or Not to Trust: A Tutorial on Trust Planning for Wealthy Families & Their Advisors”
Host: Jonathan I. Shenkman, President & Chief Investment Officer of ParkBridge Wealth Management (Contact: jonathan@parkbridgewealth.com)
Presenter: Krista M. Fenske, Esq., Cole Schotz P.C. (Contact: kfenske@coleschotz.com)
Good morning and welcome to the Park Bridge Wealth Management fall Webinar Series. This program is entitled "To Trust or Not to Trust: A Tutorial on Trust Planning for Wealthy Families and Their Advisors." As always, my name is Jonathan Shenkman. I'm the President and Chief Investment Officer of Park Bridge Wealth Management. In that role I serve in a fiduciary capacity to help my clients achieve their financial objectives.
The goal of my programs is to bring professionals together to help them better serve their clients. This is done by educating attendees on the latest topics in wealth planning, and by encouraging collaboration between a client's attorney, CPA, and financial advisor where appropriate.
My practice focuses on working with high net worth families, businesses, and not-for-profits. I manage individual investment portfolios, trust accounts, corporate retirement plans and endowments to help my clients achieve their financial goals. In addition to the 20 or so events I run every year, I also do a fair amount of writing on the topics of investing and financial planning. You can read my work in a variety of periodicals, including Barron's, CNBC, Forbes, Kiplinger, The Wall Street Journal, and Trust and Estates Magazine to name just a few.
You can also see all my work on my website at parkbridgewealth.com/articles, or by following me on social media at Jonathan on Money. Additionally, you could check out my weekly podcast which is also called Jonathan on Money, and you could listen to that on Apple, Spotify or wherever you get your podcasts. Today, we're privileged to hear from Krista Fenske of the law firm Cole Schotz based in Hackensack, New Jersey.
By way of background, Krista works in the firm's Tax Trust and Estates Department and specializes in estate planning. Prior to joining Cole Schotz, Krista worked as a litigation and real estate attorney for law firms in Manhattan and New Jersey, and before that she worked for the IRS. Today Krista will be speaking about "To Trust or Not to Trust: A Tutorial on Trust Planning for Wealthy Families and Their Advisors."
And with that introduction I'll now turn the program over to Krista.
Krista Fenske: Thanks so much, Jonathan, and thank you so much for having me here today. I'm thrilled to be here. Good morning, everyone. As Jonathan mentioned, my name is Krista Fenske. I'm a trust and estates attorney at Cole Schotz, which is a midsize law firm in Hackensack, and my practice focuses on estate, trust and gift tax planning for individuals, couples, and families in New York and New Jersey.
One of the most common questions that I get from clients is, "Should I have a trust? Should I put my house in a trust? Are there assets I should put in a trust to protect them?" In this morning's webinar, I'll be discussing trust planning, certain types of trusts that are out there, the purposes of each, and when the use of a specific trust would be appropriate. Since there are very many trusts that are out there, and we don't have sufficient time, I'm only going to be focusing on 3 or 4 of them for purposes of this webinar.
So the basic question I like to start with is, what is a trust and why should you use a trust?
A trust is, in basic terms, created when a person known as the grantor has assets that he or she wants to pass to certain beneficiaries in a controlled manner, where access to the assets are decided and determined by a trustee. The trustee could be one of the beneficiaries, or it could be an independent person, trustee, unrelated to the beneficiaries of the trust.
The grantor would then transfer these assets to a trust that is governed by a carefully drafted trust agreement, and the terms of that trust agreement would control. A trust can be created during a person's lifetime in which it would be called an inter vivos, or living trust, or a trust can be created on a person's death under his or her will or pursuant to another separate trust agreement.
Trusts can be used to own a wide range of assets for a variety of different reasons. One reason to utilize a trust would be to avoid the probate process if you are in a state where the probate process is difficult and expensive. Utilizing a revocable trust, which I'll talk about in a moment, can be used to avoid probate and have the assets passed to your beneficiaries in a much faster and more streamlined manner.
A major reason to use an irrevocable trust would be estate tax savings. Assets that you transfer to an irrevocable trust for gifting purposes will be excluded from your taxable estate if you have assets that rise to a level of estate tax exposure, which I'll also discuss in a moment.
Assets transferred to an irrevocable trust also have protection from creditors in most instances, and from the claims of a spouse in the event of a divorce.
Trusts also help to keep assets in your family. Many of our trusts provide for what are called dynasty trusts, where you leave assets to a child in a trust. The assets are used for the benefit of the child during his or her life, and then, at the child's death, the assets pass to the child's descendants in trusts with the same terms as the trust for the child, and these dynasty trusts continue for generations. It helps to keep assets in your family and in your bloodline.
And basically a basic reason to use a trust is, it ensures that the assets pass to your intended beneficiaries rather than leaving assets to a beneficiary outright, where the beneficiary is free to distribute or give the assets to anyone he or she chooses, which could be contrary to your intentions.
Speaking of estate tax savings, I'd like to just quickly go over the current estate and gift tax law as it is currently. The Federal estate and gift tax exemption is the amount that anyone can leave to any person other than a spouse or a charity during your lifetime or at your death, without paying any Federal estate or gift taxes.
The Federal estate tax exemption is currently $13.61 million dollars per person in 2024, and it is scheduled to be reduced to approximately half that amount, about $7 million dollars, in January of 2026 absent intervening legislation. And the Federal estate and gift tax is a 40% tax.
Assets passing to a spouse or to a charity are never subject to any estate tax on the State or Federal level.
New York imposes its own estate tax at a rate of about 16%. New York has a $6.94 million dollar estate tax exemption. So New York imposes estate tax on estates with assets in excess of $6.94 million passing to someone other than a spouse or a charity in 2024, and this amount, exemption amount is indexed annually for inflation.
New York does have what's called an estate tax cliff, which means, if the value of all the assets in your estate exceeds $6.94 million, let's say you have a $10 million estate, New York imposes its 16% tax on the entire $10 million of your estate, not just the difference or the excess above $6.94 million, and that's why it's called an estate tax cliff.
New York does not impose any gift tax, but it does have a 3-year clawback period for gifts that are made within 3 years of your death. So if you gift assets, you gift them away, let's say to an irrevocable trust for gifting purposes to exclude them from your taxable estate, and you die within 3 years of that gift, those gifts are pulled back into your estate under New York law.
New Jersey does not impose any estate or gift tax, but it does have an inheritance tax for assets passing to beneficiaries other than a spouse, parent, or lineal descendant.
The first type of trust I would like to discuss is a revocable trust. By the name, Revocable Trust means that the trust is revocable, amendable, can be changed, modified by the grantor of the Trust at any time during the grantor's life.
This type of trust is used primarily for the purpose of avoiding the probate process in states such as New York and Florida, where the probate process is very extended and expensive.
A revocable trust can also be used if a person wants to keep their estate plan private because the trust is never filed with a probate court - it's a private document. So, even though you would have a will in connection with your revocable trust, it would be a very short will that says very little, and that document would get probated, but the trust itself would not.
A revocable trust can also be used sometimes by people who need assistance in managing their finances. Perhaps someone who's elderly, or someone who just isn't good with managing their finances. They could have a co-trustee appointed to serve with them as a co-trustee of their revocable trust, and get assistance with managing their assets in that manner.
So back to the probate process, when you pass away, most states have a probate process which requires the involvement of a surrogate's court that needs to get final approval in order for all of the assets in a person's estate to be distributed to the beneficiaries. In states like New York and Florida, this process has been taking years, or can take several years just because of delayed court involvement and approval.
When you use a revocable trust, any assets that are owned in the trust when you pass away completely avoid the probate process in those jurisdictions. So you would create a revocable trust and transfer as many of your assets as feasible to the trust during your life.
You would be both the grantor and the trustee of the trust. You would have full control over and access to all of the assets in the trust during your life, and as mentioned before, you can amend and/or revoke the trust at any time while you are living. You can undo the trust, you can take the assets out of the trust. You're in complete control of those assets during your life.
You're the sole beneficiary of the trust, and the trust is also going to contain provisions directing who receives assets when you pass away in the same manner as your will. So if you leave all of your assets to your spouse, and then, when your spouse passes away, the assets pass to your children, let's say in lifetime dynasty trusts for their benefit - all of those provisions would be included in your revocable trust.
And then, when you pass away, the trust becomes irrevocable at that time, and the assets in the trust pass to your beneficiaries without any court involvement or probate process.
So the idea is, assets in the trust pass to your beneficiaries much more quickly and in more streamlined manner, having avoided probate.
Revocable trusts do not exclude assets from your taxable estate, so any assets in your revocable trust are part of your estate and subject to estate tax. And this type of trust does not provide any type of creditor protection. I just wanted to mention that there are tax planning mechanisms and trusts that can be built into your revocable trust to minimize estate tax, but the assets that are owned in your trust are part of your taxable estate.
Now, I'd like to talk about irrevocable trusts that are used for gifting purposes. Most often an irrevocable trust, whose terms cannot be changed or modified once the trust has been created, are used for gifting purposes, where you transfer assets to the trust for the purpose of having the assets excluded from your estate when you pass away.
Any gifts that you make to such a trust are going to utilize a portion of your lifetime gift exemption, which is the $13.61 million exemption I was discussing previously.
Assets owned in a properly drafted irrevocable trust are generally protected from the claims of a beneficiary's creditors, or of the beneficiary's spouse in the event of divorce in most states, such as New Jersey.
And, as mentioned earlier, if an irrevocable trust includes dynasty trusts for children and descendants, this will help to keep assets in your family and in your bloodline.
Proceeds in an insurance trust can be very useful to satisfy estate tax liability if you have a taxable estate. Liquid assets and proceeds from the Insurance Trust can also be swapped with non-liquid assets in your estate. Say, for instance, your estate has a lot of real estate and not a lot of liquid assets, and you need liquidity to make distributions to beneficiaries. The real estate could be swapped with liquid assets in the trust to be used to pay beneficiaries or to pay off debts and other liabilities.
A Qualified Personal Residence Interest Trust is another type of trust that can be used for gifting. An individual or a married couple can gift interest in a personal residence or a vacation home to this type of trust (acronym is called a QPRIT) for the benefit of the grantor's spouse and children.
This could be used in addition to SLAT gifting if your net worth is substantially above the estate tax exemption and you own personal residences that have value. It has to be either your personal residence and/or a vacation home. So each of these residences qualifies to be used to be gifted in this type of trust.
And so the grantor would gift, usually it's a fractional interest in the home to a trust that permits the grantor and the spouse to continue to reside in the home for a term of years consistent with the grantor's current life expectancy.
If the grantor survives the term of years, the value of the home will be excluded from his or her taxable estate, and the home would then continue to be held in trust for the grantor's spouse and descendants, and the grantor then has the option to continue to reside in the home upon the expiration of the term.
So, because the grantor is being permitted to reside in the home for this term of years, and this interest is being gifted to a trust for beneficiaries, this is considered a fractional remainder interest that qualifies for special discounts, which reduce the value of the gift and allows you to use less of your exemption.
And again, I just wanted to mention, when considering gifting, you're going to gift assets to trusts like these - the Insurance Trust, the SLAT, the QPRIT - if your net worth is of a level that is going to cause you to have estate tax exposure, if you're substantially above the exemption at the time.
And so it's important to carefully consider what types of assets should be gifted, because in certain cases, and with the SLAT at least, you will ultimately lose access to those assets because you're giving them away. You're giving up the right to use them. So with a SLAT, if you're just creating a SLAT for the benefit of your spouse and children, and the other spouse is not creating a SLAT for your benefit, the assets you give away are not - you won't have access to them anymore. So it's just important to make sure that you have sufficient assets remaining to maintain your current lifestyle and expenses, etc.
Of the irrevocable trusts that I've just been discussing, an important feature of those trusts is that they are often drafted as grantor trusts, or also called intentionally defective grantor trusts.
Grantor Trust means that during the grantor's life, items of income, deduction, gain, credit attributable to the trust assets will be reported on the grantor's individual income tax return, and all income taxes will be paid by the grantor on his or her income tax return, meaning that any income taxes earned by the trust are paid by the grantor.
This is done in order to preserve the assets for the beneficiaries, so that they are not reduced by estate tax. And also another benefit of this is that the income taxes are paid by the grantor at his or her individual income tax rate, which is much less than the income tax rate of a trust.
Trusts pay one of the highest income tax rates. So if the trust were its own taxpayer, the assets in the trust would be more greatly reduced by income taxes.
In order to qualify as a Grantor Trust, there are various powers that need to be included in the trust. One of those powers would be the ability to loan assets to the grantor without adequate security - that causes the trust to be a grantor trust.
The grantor can also be given a swap power which is the ability to demand that the trustee transfer trust assets to the grantor in exchange for assets of equivalent value.
The trustee can also have the power to reimburse the grantor for any income taxes paid by the grantor on behalf of the trust. So if there comes a point where paying income taxes that year was kind of a burden for you, you can request reimbursement of those taxes from the trustee from the assets in the trust.
If the trust provides for income distributions to a spouse that can also make the trust a grantor trust. In any event, this grantor trust status can also be waived by the grantor by a written document at any point if for some reason paying the income taxes on the trust is no longer desirable.
Some other considerations I wanted to discuss when it comes to gifting: any assets that you transfer to an irrevocable trust will lose what's called the step up in basis, and what that means is if I were to pass away, and I own a house in my name, and I paid $100,000 for the house, and now the house is worth $5 million when I die, and the home passes to my children under my will, my children would receive a stepped up basis equal to the date of death value of the home of $5 million because I kept the home in my name, and it passed to them under my will.
And so if they go to sell the house, they're not going to have any capital gains tax issue because they're getting the date of death basis, date of death value, and not my original basis of $100,000. However, when you transfer assets to an irrevocable trust for gifting purposes, you no longer receive the step up in basis, or the beneficiaries don't receive that step up, and instead they get a carryover basis which, in the example of my $100,000 home, they would receive my basis in that home for $100,000, and they would have a major capital gains tax issue when the trust goes to sell the home at a later point in time.
For this reason we always recommend that clients transfer high basis assets to irrevocable trusts to the greatest extent possible, just to avoid the disparity of having a huge capital gains tax if the asset were ever to be sold.
When you gift assets to trusts, a gift tax return always has to be filed, even though no gift tax is due, to track the use of your lifetime exemption. And so that would need to be filed on April 15th of the year following the year in which the gifts were made, and that can be done by your accountant, and we also prepare gift tax returns as well.
Annual exclusion gifts can also be utilized in these trusts to minimize the use of your lifetime exemption, which is the $13.61 million figure I was discussing previously. The annual exclusion is each year you're allowed to gift currently $18,000 per person in any year to as many people as you want without using any portion of your lifetime gift exemption. So if you have 5 beneficiaries of a trust, and the trust provides for the use of annual exclusion gifts, you can utilize $90,000 in annual exclusions for gifts you make to the trust without using any portion of your lifetime gift exemption.
And the other consideration is just the fact that when you gift away assets, you're really giving up all control over the assets. And that's just something that you should consider.
And that concludes my presentation. I hope that you found it informative and useful, and I thank Jonathan very much for having me here today.
Jonathan Shenkman: Thank you so much, Krista, for that informative discussion. And if anyone has any specific questions, new business opportunities, or any other issues they'd like to discuss, please feel free to reach out directly to Krista or myself where appropriate, and I'll be sure to include her contact information as well in the follow-up email to this program that goes out tomorrow morning. As I mentioned at the onset, the goal of these programs is to stay up to date on timely wealth management related topics, and to collaborate where appropriate. And I think we can all agree that the clients who are best prepared are the ones who are served by a team of knowledgeable advisors.
Three more quick items before I let you go. First, my fall Webinar series continues on November 14th featuring Amy O'Hara of the law firm Littman Krooks based in Westchester, New York, and Amy's going to be speaking on the very important topic of fundamentals of SSI, SSDI, Medicaid and Medicare eligibility, and I'll send out an invitation to that program in the coming days. In the meantime, if you have a friend, colleague, or client who would like to be notified of my upcoming webinars, they can email me with the word "webinar" in the subject line. I'll be sure to add them to my webinar distribution list. And my email is Jonathan@parkbridgewealth.com.
Second, you can follow all my work on X and Instagram at Jonathan on Money. You can also listen to my weekly podcast called Jonathan on Money which is available on Apple, Spotify or wherever you get your podcasts, and you can watch my regular financial planning videos by following me on YouTube at Jonathan on Money as well.
And third, please take 30 seconds to fill out my survey at the end of this program. It helps me improve my webinars and provide timely and interesting content to attendees. And I thank you in advance for that. And with that this concludes today's session. Please stay safe and healthy and have a wonderful day, everybody.
Krista Fenske: Thank you, Jonathan.