Unfortunately, estate-planning opportunities tend to be hard to time. Practically speaking, you tend to not be “done” with your estate when the law creates a planning window. Certainly, that was the joke in 2010 when the estate tax lapsed and it become “the year to die.” (Just ask the family of George Steinbrenner!)
As I (and many others) have noted previously, both 2011 and 2012 are incredibly favorable years for gifting. While the law (and other factors) have made these scant two years such a great window, you may feel that your not yet ready to part with the assets of your estate you might otherwise want to gift. Thankfully, there are a number of legal “tools” that allow you to give without giving up (at least not yet) such assets.
I was surfing the internet and found an excellent article in The Des Moines Register regarding this issue (Retained Income Trusts Benefit Heirs). In fact the article provided a brief overview of those legal tools I thought it you might enjoy.
Bottom line: The solution to giving without giving up may be accomplished via a class of trusts called “retained interest trusts.” Why this name? Because, literally, you retain an interest in the assets and the type of interest retained, in turn, determines the exact kind of trust. As with most things in life, each flavor of trust has its own strengths, weaknesses, and a terrible acronym.
The GRAT, or “Grantor Retained Annuity Trust” is the most commonly talked about these days for a number of reasons (like those in this recent article). Essentially, a GRAT allows you to retain an interest in the assets in the form of an “annuity” that will provide a steady income to you.
The GRUT, or “Grantor Retained Uni-Trust” allows you to keep an interest in the assets in the form of a regular payment, which is a “fixed percentage” of the value of the assets in the trust. This means if the value of the assets appreciates, so to will your regular payment.
Then there’s the GRIT or “Grantor Retained Income Trust,” which allows you to retain an “income” from the assets. Note: This generally is less flexible when it comes to giving to heirs, except when it is used to give away a residence. (This trust is often used in Medicaid planning situations.) A GRIT can also be set up as a QPRT, which is a “Qualified Personal Residence Trust.” With a QPRT the asset is a residence and the income to be retained is the “right to live there.” In other words, putting your home into a QPRT is giving the home away, but without the hassle of moving (yet.)
In all cases, whatever you would give away to your loved ones outright is, instead, put into the trust. You retain the respective interest in the asset and name your heirs as beneficiaries, effectively transferring the asset and taking advantage of a good estate planning opportunity well before your time. In all cases, though, a great deal depends on your specific situation and certainly qualified legal counsel will be required to assess how to best weave the plan together (not to mention in implementing the appropriate trust).