There are a number of special named trusts depending on their purpose and use. A few of them are as follows:
• A charitable trust may be either permanent or short term (reversionary) depending on the objective of the grantor. For example, a man could set up a permanent trust with the income payable to his wife for her lifetime. At her death, the remaining assets could be paid over to the charitable or educational institution. The grantor in this case would receive an immediate charitable deduction from his taxable yearly income for the “present value” of the amount that the institution will receive from the trust fund. The amount is calculated from actuarial tables. The total assets would be removed from the grantor’s estate for estate tax purposes provided all requirements are met.
• A short term reversionary trust may be used as a tax-saving tool for making annual donations to charity. For example, securities might be placed in trust to provide $1200 of income per year. The trustee pays the whole income to the charity without it having been taxed as part of the grantor’s income. A charitable trust may last for as short a period as two years and still relieve the grantor of the tax on its income.
• Marital deduction trusts are used to take maximum advantage of the estate tax laws. Usually they are divided into two parts. One-half of the trust assets are given to the spouse for life with a general power of appointment. The other half would name him or her as the beneficiary for life with a remainder interest to the children. It is usual to suggest that the spouse use money from the part one trust first in order to reduce estate taxes at his or her death.
• The reversionary trust or short ter trust is sometimes referred to as the “Clifford Trust.” The trust property in a reversionary trust reverts to the trustor (settlor) of the trust after a stated period of time. Under this type of trust the property and/or securities are placed in the care of a trustee for a period of not less than ten years. At the end of the ten-year period, the property would revert back to the original owners. Normally the objective of creating a reversionary trust is to reduce income taxes. However, the 1986 Tax Reform Act removed the ability to reduce income taxes by using a Clifford trust. Note that if all the income is paid to the beneficiary(s), the tax return is filed by the beneficiary(s). If the funds are accumulated, the tax return is filed by the trust; note that a trust required to distribute all of its income currently is allowed a personal exemption of $300. All other trusts are allowed $100. (I.R.C. Sec. 642.)
• Life insurance trusts are used widely in estate planning. The trusts may be either funded or unfunded. If the policies are on the lives of persons other than the creator of the trust, the income from trust funds used to pay the premiums will be taxed to the trust. Thus an income tax saving may result. There are many variations of the insurance trusts for which insurance advisors should be consulted.
• Power of Appointment Trust. A general power to appoint during life is the equivalent of outright ownership since the capital is available for the asking. Most authorities prefer to restrict the power to one exercisable by will only. This is enough to qualify the bequest for the marital deduction and preserve the property for future generations.
Some of the advantages of a power of appointment trust are as follows:
• There is a good chance the property will pass according to the wishes of the first spouse to die, because of the usual clause designating how the capital will be distributed at the surviving spouse’s death in the event he or she fails to exercise the power.
• There will be savings in administration fees and attorney fees since the trust assets will form no part of the surviving spouse’s probate estate.
• It relieves the surviving spouse of investment and management problems.
• Flexibility may be introduced, allowing the surviving spouse limited invasion privileges during life and by authorizing the trustee to pay additional capital sums to the surviving spouse at any time or times.