A “trust” is a legal relationship created when one party (the “grantor”) transfers property to another (the “trustee”) to be held for the benefit of other persons (the “beneficiaries”). The term “trust” commonly refers to a written document such as a “Trust Agreement” or “Declaration of Trust”.
A/B Trust: A type of revocable living trust used by married couples. In this type of living trust, two trusts (trust A and trust B) are created at the time the first spouse dies. By dividing the couple’s estate into two trusts at the first death, each spouse can pass the maximum amount of property allowed to avoid federal estate taxes. One trust, usually trust A, is often referred to as the “Marital Trust” and the other trust, usually trust B, is often referred to as the “Family Trust”, “Bypass Trust”, or “Credit Shelter Trust”.
A Trust: See “Marital Trust”.
Age 21 Trust: See “Minors Trust”.
Asset Protection Trust: Also known as a “Domestic Asset Protection Trust”. A trust designed to keep its assets out of the hands of the beneficiaries’ creditors. Assets protection trusts are usually irrevocable, and may be formed pursuant to a special state statute, such as Utah Code § 25-6-14.
B Trust: See “Family Trust”.
Blind Trust: A type of revocable living trust established by political figures to provide for third-party management of the politician’s investment portfolio without the politician being aware of the asset mix or investment decisions.
Bypass Trust: See “Family Trust”.
Charitable Lead Trust: Also known as a “CLT”, “CLAT” or “CLUT”. A trust used to make large donations of property to a charity for a period beginning at the trust’s creation, with a remainder interest in the trust paid to the trustor or his designees. Donation to a CLT may carry income and estate tax advantages to the person making the donation. If a “CLAT”, the interest to the charity is paid in the form of a periodic annuity. If a “CLUT”, the interest to the charity is paid periodically as a fixed percentage of the trust assets (i.e., a “unitrust”).
Charitable Remainder Trust: Also known as a “CRT”, “CRAT” or “CRUT”. A trust used to make large donations of property to a charity so the person making the gift or donation can obtain an income and estate tax advantage. In a CRT, the donor reserves the right to receive trust income during his life or some other specified time period, and when the agreed period expires, the property is distributed to the charity. If a “CRAT”, the interest to the donor is paid in the form of a periodic annuity. If a “CRUT”, the interest to the donor is paid periodically as a fixed percentage of the trust assets (i.e., a “unitrust”). A variations of CRT is the “Net Income Makeup Charitable Remainder Unitrust” or “NIMCRUT”, which allows the trustee to invest in growth-oriented assets initially, then at a specified date (such as the grantor’s retirement) the trust investments re-focus on income-producing investments, and prior unpaid distributions to the grantor (unpaid due to the absence of distributable income) are then made up.
Clifford Trust: A trust that is now outlawed by changes in the tax law. Its purpose was to shift income from one person to another, and reduce tax liability.
Complex Trust: A federal income tax term that describes any trust where the income is not required to be distributed to the beneficiaries at least annually. A complex trust must either pay the income tax on all its accumulated annual income, or timely distribute the income to the trust beneficiaries, in which case they become liable to pay the tax on their share of the trust’s distributable net income.
Constitutional Trust: Also known as a “Family Estate Trust” or a “Pure Equity Trust”. A seemingly irrevocable trust arrangement used as an illegal device to avoid taxes. Courts have repeatedly ruled such trusts to be ineffective for their intended tax-avoidance purpose, and the IRS commonly penalizes or prosecutes those using or promoting constitutional trust schemes. The fraudulent pitch made by promoters of constitutional trusts is the trusts are formed pursuant to “common law”, which affords the arrangement special protection under the U.S. Constitution, and therefore immunity from tax.
Constructive Trust: A trust imposed by a court. It involves no written trust instrument. Rather, the court declares that a person took or held property or obtained some benefit from property, and therefore the property is to be held for the benefit of another person.
Contingent Trust: A trust that either comes into being or is funded only upon the happening of some event (which event may never occur).
Crummey Trust: Named after the 1968 case of Crummey v. Commission of Internal Revenue. A trust that allows one or more beneficiaries to withdraw contributions to the trust within a fixed period of time after such contributions are made by another person. The purpose is to qualify such trust contributions as completed gifts for federal gift tax purposes.
Credit Shelter Trust: See “Family Trust”.
Defective Grantor Trust: Also known as an “Intentionally Defective Grantor Trust” or “IDGT” or “Grantor Deemed Owner Trust”. A device for “freezing” the value of an asset for estate tax reduction purposes. An IDGT is an irrevocable trust with provisions that are purposely designed to make the grantor the trust’s owner for income tax purposes but not for gift and estate tax purposes. It is created during the grantor’s lifetime to facilitate the transfer of property to younger generations at current values. Once property is sold to an IDGT, all future appreciation in the value of that property will accrue in the estates of the trust beneficiaries (who are the next younger generation) and not in the estate of the grantor. Thus, the grantor is not defective – only certain aspects of the trust!
Delaware Business Trust: A device that functions more like a business entity than a traditional trust. A special purpose vehicle for structured finance in corporate transactions, such as asset-backed securitizations.
Disclaimer Trust: A trust meant to receive, manage, and dispose of property that may be disclaimed (i.e., a right surrendered) by a beneficiary.
Discretionary Trust: A trust over which the trustee has discretion whether or not to take some action, such as to make distributions of trust income or principal to beneficiaries. The extent of that discretion may be narrow or broad, as provided in the trust instrument.
Domestic Asset Protection Trust: See “Asset Protection Trust”.
Dry Trust: Also known as a “Standby Trust”. A trust provided for in a trust instrument, but not yet funded.
Dynasty Trust: A type of irrevocable trust that is intended to endure for a significant length of time and benefit multiple generations. Its duration is often limited only by the applicable “rule against perpetuities”, which has been repealed or lengthened by several states. Dynasty trusts typically require careful consideration of the implications of the federal “generation-skipping transfer” tax. Income tax impacts, both known and unknown future impacts, may also limit the attractiveness of a dynasty trust.
Education Trust: A trust established for the sole or primary purpose of paying for the education of its beneficiaries.
Electing Small Business Trust: Also known as an “ESBT”. A type of trust designed to hold shares of a Subchapter S corporation without causing the corporation’s S election to terminate. To qualify as an ESBT, beneficiaries must have acquired their interests by gift or bequest. No interest in the trust may be acquired by purchase. Also, only individuals, estates, and certain tax-exempt organizations may be ESBT beneficiaries. The advantage of an ESBT over a QSST is that the ESBT permits the trustee to “spray” income among the trust’s beneficiaries (i.e., direct more or less income to one beneficiary at the expense of the others), and more than one person may be a current income beneficiary. Also, the ESBT allows the trustee to accumulate rather than currently distribute income. This flexibility comes at a price, however, which is that trust income is taxed at the trust level, prior to distribution to beneficiaries.
Family Trust: Also known as a “B Trust”, “Bypass Trust”, or “Credit Shelter Trust”. Established as part of a revocable living trust by married couples, the family trust is to be funded at the death of the first spouse. The trust is designed to have its assets excluded from the grasp of the federal estate tax upon the death of the second spouse. The trustee has discretion to benefit both the spouse and children, but with a strong preference for the spouse.
Generation-Skipping Trust: A trust which either benefits multiple generations or fails to provide benefits for members of one or more generations removed from the grantor. This trust is often engineered to maximize the allowed exemption from the federal generation-skipping transfer tax.
Grantor Trust: A trust in which the person establishing the trust retains enough “ownership rights” or “incidents of ownership” that the person is treated by the IRS as the owner of the trust assets for income tax purposes. The right to revoke the trust is sufficient to make the trust a grantor trust.
Grantor Retained Interest Trust: An irrevocable trust in which the grantor retains the right to obtain substantial benefits from the trust for a certain period or until the occurrence of an event. Upon the termination of the grantor’s interest, the balance of the trust is then paid to designated persons. Its purpose is to reduce estate tax at the grantor’s death (but its purpose is frustrated if the grantor dies during the trust term). If a “GRAT”, the interest to the grantor is paid in the form of a periodic annuity. If a “GRUT”, the interest to the grantor is paid periodically as a fixed percentage of the trust assets (i.e., a “unitrust”). If a “GRIT”, all trust income is paid to the grantor periodically.
Honorary Trust: See “Pet Trust”.
Irrevocable Trust: A term used to describe a trust in which the grantor (i.e., creator of the trust) has, by the terms of the trust agreement, specifically given up the power to alter, amend, or terminate the trust, either in whole or part.
Irrevocable Life Insurance Trust: Also known as an “ILIT”. An irrevocable trust whose sole purpose is to own life insurance policies, often on the life of the grantor. Typically the grantor makes periodic contributions to the trust that are subject to Crummey withdraw rights (see “Crummey Trust“) by the beneficiaries. If the withdrawal rights go unexercised, the contributions are used to pay the life insurance premiums. At the grantor’s death, proceeds from the life insurance are typically distributed to the beneficiaries (who then have absolute discretion whether to use their benefits to pay the grantor’s estate tax or other liabilities).
Joint Trust: A trust created by a single trust instrument by two grantors, usually a married couple.
Marital Trust: Also known as the “marital deduction trust” or “A trust”. Established as part of a revocable living trust by married couples, the marital trust is to be funded at the death of the first spouse. The trust is designed to have its assets included in the “gross estate” of the second spouse at his/her death, and therefore potentially subject to the federal estate tax upon the death of the second spouse. Accordingly, at worst the marital trust will have the effect of delaying the imposition of the federal estate tax on a married couple’s estates. All trust income must be paid regularly to the surviving spouse, and the trustee often has discretion to distribution trust principal to the spouse as well.
Medicaid Trust: See “Special Needs Trust”.
Minors Trust: Also known as a “2503(c) Trust” or an “Age 21 Trust”. A trust designed to hold assets and provide benefits for a person until he/she attains the age of majority (which in Utah is age 18), but such trusts commonly extend to age 21 because federal tax law allows it. Typically the grantor will make annual contributions to the trust equal to the annual gift tax exclusion for federal gift tax purposes. Section 2503(c) of the Internal Revenue Code requires such trusts to grant the trustee discretion to distribute income to the minor beneficiary, and distribute all principal and income to the beneficiary at age 21.
Offshore Trust: A trust formed under the laws of and administered by a trustee located in a foreign country. A form of “Asset Protection Trust”, it is often misused as an illegal scheme to shield income from U.S. taxation and assets from the grasp of the IRS.
Power of Appointment Trust: A trust in which a designated person (usually the beneficiary) has the power to appoint (meaning “designate”) one or more persons to receive trust principal. A “testamentary power of appointment” may only be exercised by a provision in the person’s Will.
Qualified Domestic Trust: Also known as a “QDOT”. A trust designed to benefit a surviving spouse who is not a citizen of the U.S. The U.S. tax code requires that QDOTs contain specific provisions governing the distribution of income and principal and who may be the trustee.
Qualified Personal Residence Trust: Also known as a “QPRT”. An irrevocable trust whose sole asset is the grantor’s personal residence (primary or secondary). The grantor may continue to occupy the residence for a specified period of time, after which title to the residence passes to other beneficiaries (typically the grantor’s children). The QPRT is used as a device to reduce federal gift or estate tax because the value of the remainder interest passing to the children is either frozen or somewhat reduced. The grantor’s premature death frustrates this tax-reduction plan. The QPRT is a “grantor trust” for federal income tax purposes.
Qualified Subchapter S Trust: Also known as a “QSST”. A type of trust designed to hold shares of a Subchapter S corporation without causing the corporation’s S election to terminate. To qualify as a QSST, the trust instrument must require that: (a) during the life of the current income beneficiary, there be only one current income beneficiary of the trust; (b) any corpus distributed during the life of the current income beneficiary be distributed only to such beneficiary; (c) the beneficial interest of the current income beneficiary must terminate upon the earlier of that beneficiary’s death or the trust’s termination; (d) upon the trust’s termination during the life of the current income beneficiary, the trust must distribute all its assets to such beneficiary; and (e) all trust income must be distributed currently (at least annually) to only one individual who is a citizen or resident of the U.S.
QTIP Trust: Also known as a “Qualified Terminable Interest Trust”. A type of irrevocable trust designed to qualify for the marital deduction for federal estate tax purposes. The trust restricts the surviving spouse’s ability to distribute trust property. Typically the surviving spouse enjoys the trust income during his/her lifetime, then ownership of the trust property passes to the persons selected by the now-deceased spouse during his/her life.
Rabbi Trust: Not a true trust, but rather a type of deferred compensation arrangement. Because recent tax law changes have severely restricted deferred compensation arrangements, rabbi trusts are now rarely used.
Real Estate Investment Trust: Also known as a “REIT”. A trust that owns and operates income-producing real estate or debt secured by real estate. Ownership interests in REITs are called “shares”, and are commonly traded as securities in public stock markets. Complex federal tax rules govern REITs, the most notable of which is that the REIT must annually distribute to shareholders at least 90% of its net taxable income.
Residuary Trust: A broad spectrum of trust types that are designed to receive, manage, and dispose of the assets remaining after various expenses are paid and other distributions made.
Self-Settled Trust: A trust created by the grantor for his/her primary or exclusive benefit.
Simple Trust: A federal income tax term that describes any trust where the income is required to be distributed to the beneficiaries at least annually. Because all the trust’s income is distributed to the trust beneficiaries, they are liable to pay the tax on their share of the trust’s distributable net income.
Special Needs Trust: An irrevocable trust established by a parent for the benefit of a handicapped child (including an adult child). The trust is designed to provide benefits on top of the basic support benefits to which the child may be entitled under SSI, Medicaid, and other government programs. If properly structured and administered, the trust will not compromise the child’s eligibility for such government programs.
Spendthrift Trust: A class of trusts that prohibit the beneficiary from transferring in any way his/her interest in the trust, and also prohibits the beneficiary’s creditors from attaching the beneficiary’s interest in the trust.
Sprinkling Trust: A trust in which the trustee is empowered “sprinkle” distributions among the beneficiaries, with the discretion to benefit one more than another and to exclude some altogether.
Structured Settlement Trust: A trust created to hold and administer a personal injury award. Often the intent is to ensure that the beneficiary does not spend the award money rashly. Rather, trust benefits are commonly required to be distributed over a period of many years.
Testamentary Trust: A trust created pursuant to a person’s Will. Accordingly, the trust becomes active and is funded at the person’s death.
Total Return Trust: Also known as a “Unitrust”. A trust where the distributions to beneficiaries are based on a fixed percentage of the trust’s net assets, with the trust’s assets revalued each year. This differs from the more traditional concept of distributing trust income only.
Totten Trust: Not a trust at all, but a reference to a type of bank account in which the account owner names the person(s) to whom ownership of the account is to pass upon the owner’s death. Thus, the account is not subject to probate. Today the term “totten trust” has fallen out of use, and the bank account device is more commonly referred to as a “pay on death” designation, or “POD”.
Trust Deed: An instrument that functions as a device to attach real estate as security for a loan. Its function is similar to that of a mortgage. Pursuant to a trust deed, the property’s owner conveys title to the property to a trustee, who holds the property as security for a loan made by another party.
2503(c) Trust: See “Minors Trust”.
Unitrust: See also “Total Return Trust”. A method of computing distributions from the trust based on a percentage of trust assets at periodic distribution dates.
Voting Trust: An arrangement used in corporate law whereby certain shareholders temporarily assign the right to vote their shares to another person. The person to whom the voting rights are assigned is the trustee of the voting trust.
Wealth Replacement Trust: A sub-type of life insurance trust, the purpose of which is to hold a life insurance policy, the proceeds of which are meant to replace other of the grantor’s assets that were independently transferred elsewhere, typically to charity.