Trusts and Sub-Trusts

What is a Sub-Trust?

A Sub-Trust is a secondary trust whose terms are contained within an article of a Revocable Trust. This allows you greater flexibility to use, manage, and benefit from your assets while you’re alive, while also strategically laying out the plan for your assets after you pass. Modern families have unique situations to plan for, such as children with special needs, beneficiaries who receive government benefits that an inheritance would interfere with, setting aside money for college, leaving funds for the care of pets, and planning for digital assets. Below is an explanation for a few of the different sub-trusts we offer. If you don’t see what you’re looking for, give us a call.

Special Needs Trust (SNT)

A Special Needs Trust, 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 directly receive an inheritance that increases their wealth. The Special Needs Trust names a trustee to manage the assets for the beneficiary and allows for discretion to supplement their needs, but not to provide so much from the trust that they lose their benefits.

Dynasty Trust or Generation Skipping 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 also referred to as a “Generation Skipping Trust” or GST. The term “generation-skipping” is a misnomer. It is not that we are skipping a generation from the benefits of an inheritance. Rather, the Dynasty Trust includes provisions so that the next generation can skip estate taxes. Upon your death, your children have the use and enjoyment of the Generation Skipping Trust for their entire lifetime. It is upon your children’s death that the tax-free “skip” occurs. The Generation Skipping Trust passes from your children to your grandchildren free of any estate taxes. If structured properly, the assets of the Dynasty Trust satisfy the provisions of Arizona’s “spendthrift” statute. This provides protection from creditors going after your children’s inheritance. Consequently, creditors resulting from lawsuits, divorce, or bankruptcy cannot attack the assets of the Generation Skipping Trust.

IRA Look-Through Trust

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

The default taxation rule when a trust is named as the beneficiary of a retirement account is that the money must be paid out and all the income taxes must be paid within five years. The five-year rule applies if the account owner had not 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 beneficiary of the IRA. This enables the trust to take advantage of 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

A Custom Incentive Trust uses the income and principal of a trust to encourage or discourage certain behaviors. For example, the money in the trust fund cannot be inherited unless certain incentives have been met. 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 they can be measured and are not against public policy. The condition needs to be something that can easily be measured and enforced by the trustee.