Sub Trusts

Special Needs Trust (SNT)

A special needs trust or sometimes called a supplemental needs trust (SNT) is a tool used when planning for a beneficiary with a disability.  Without a special needs trust the beneficiary could lose their Supplemental Security Income (SSI) or Medicaid (ALTCS) benefits if they received an inheritance directly.  The SNT names a trustee to manage the assets for the beneficiary and allows for discretion to supplement their needs, but not to provide too much from the trust so that they lose their benefits.

Dynasty Trust (GST)

A Dynasty trust is a trust that is designed to shelter assets from estate taxes and potential creditors of the beneficiaries.  This is alsoreferred to as a “Generation skipping trust”. The term “generation-skipping” is a misnomer.  It is not that we are skipping your children out of the benefit of an inheritance.  Rather, we are skipping the IRS out of a generation’s worth of estate taxes.  Upon your death, your children have the use and enjoyment of the GST Trust for their entire lifetime.  It is upon your children’s deaths that the tax-free “skip” occurs.  The GST Trust passes free of any estate taxes to the grandchildren.  If structured properly, the assets of the GST Trust satisfy the provisions of Arizona’s “spendthrift” statute and are beyond the reach of your children’s creditors.  Consequently, creditors resulting from lawsuits, divorce, or bankruptcy cannot attach the assets of the GST Trust

IRA LookThrough Trust

The Supreme Court recently found that a child who inherited an IRA from her mother and filed for bankruptcy nine years later, could not shield the account from her creditors. (Clark v. Rameker).  A trust can protect the IRA assets from bankruptcy and other creditors, the most common one is a divorcing spouse.

The default rule when a trust is named as the beneficiary is that it is required to take the payout and pay all the income tax within five years.  The five year rule applies if the account owner hadn’t reached the required beginning date for taking IRA withdrawals (April 1 of the year after the account owner reaches 70 ½) before he or she died.  If the owner died on or after this date the withdrawals are calculated according to the account owner’s remaining life expectancy, as if he or she were alive. This would probably mean a more rapid payout than if the trust could use the life expectancy of its oldest beneficiary to calculate withdrawals.

With a properly drafted trust the IRS will “look through” the trust and treat its beneficiary as if he or she were directly named the IRA’s beneficiary. This enables the trust to take advantage favorable minimum-distribution rules that apply to individual beneficiaries. In trusts with multiple beneficiaries, the required yearly withdrawal will be based on the life expectancy of the oldest beneficiary.  An IRA Look Through trust provides the protection of a trust with the favorable tax treatment of an individual.

Custom Incentive Trust

An Incentive trust uses the income and principal of a trust to encourage or discourage certain behaviors.  The condition needs to be something that can easily be measured and enforced by the trustee.  The most common is a trust that encourages education.  Other common types of incentives are Income matching trusts, to provide an incentive to work, or trusts that require drug testing to discourage drug use.  Other types of incentives can be designed as long as it can be measured and is not against public policy.

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