What is a Pre-Inheritance Trust?
It is an irrevocable trust whereby you give assets away to a beneficiary before you pass on.
Are the assets still mine?
No, they are not. You remove the assets from your estate and place it in the trust. The assets are no longer yours.
Who pays taxes on the trust assets?
Normally, the trust is set up as a Grantor trust for tax purposes so that you still pay taxes on any income from the trust. It does not have to be set up this way, but this is the norm.
The trust allows for distributions to be made to you to pay any tax liabilities.
How do I move assets to the PIT?
You will need to retitle them in the name of the trust, or if the trust operates through an LLC or other such business entity then the trust will own all or some of that entity.
Are there limits to how much I can move into the trust?
No, you can move as much as you like. However, assets placed in the trust do count against your lifetime exemption. That amount is currently around $5.5 million. You can put that amount in the trust without paying gift taxes. Your spouse can place a similar amount in the trust. If you place a higher amount in the trust, then the excess amount will be subject to gift taxes. In addition, you can give away $14,000 per year. And, this amount is unlimited in duration.
Can my beneficiaries gain access to the assets?
Not unless you want them to. The trust will have a trustee who will make decisions as to who gets money and when. The trust can have an investment trustee and a distribution trustee. Your beneficiaries can be the investment trustees if you desire and a third party can be the distribution trustee in order to maintain assets protection from your beneficiary’s creditors. The distribution trustee can distribute money to the beneficiaries or make loans to them. You can provide the trustee with a Letter of Wishes which expresses your desires and intents to the trustee(s). Your beneficiaries can also be employed by one of the underlying entities and paid a salary for their contribution.
Can I control the assets in the PIT?
This is always a concern. You cannot be the trustee of the trust, but you can place the assets into an LLC or corporation and then have the trust own all or part of that entity. You then can be the manager or officer of that entity which allows you to control the assets and be paid for it in the form of salary or other non-salary compensation.
Can my beneficiaries’ creditors attach the trust assets?
No, they cannot. The assets are not in the beneficiaries’ estates. They are in the trust’s estate. No creditor of any beneficiary can attach the trust assets.
Can my creditors attach the trust assets?
No. The assets are not in your estate so the creditors cannot get what you do not own.
What about estate taxes?
This is the beauty of a PIT. There are no estate taxes on the assets of the trust. Even if the trust assets increase to a very large amount — say $20 million — there is still no estate tax. All assets pass to your heirs free of any estate taxes.
What happens if my children get a divorce? Will the ex-spouse have access to the assets?
No, they will not. Since your children do not own the assets, the trust does, then the assets are not available for an ex-spouse to gain access to should your children get a divorce.
If you currently have an asset that you know will grow greatly in value in the coming years, a PIT may be an ideal solution. Since any asset(s) that you put into the trust now (while values are low) will grow estate tax free, this could be a real home run for you and your heirs. Of course, you will want to consult with your tax advisor on any tax benefits that you may receive.