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Posted on 10/22/2009 - Preparing a living trust for your children? Don’t forget to name a guardian...
Posted on 9/30/2009 - An unusual type of trust is becoming popular...
Posted on 8/31/2009 - Can you make your trust a beneficiary of your IRA?...
Posted on 8/31/2009 - Financial elder abuse cases on the rise as economy continues to struggle...
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An unusual type of trust is becoming popular
Posted on Aug 31, 2009
A form of trust called an “intentionally defective grantor trust” is becoming very popular with some estate planners, as people look for ways to protect their assets in these uncertain financial times.
It may seem counterintuitive to trust your assets to a fund that has the words “intentionally defective” in the title, but the unappealing name hasn’t dampened their appeal. However, there are drawbacks to this form of trust.
According to some estate planners, the benefits of an intentionally defective grantor trust include:
- Assets can be passed on to grandchildren
- Heirs can receive more money than they would with another form of trust
- It is possible to withstand IRS scrutiny with this type of trust
Drawbacks of these trusts:
- The IRS may be more likely to investigate a trust set up this way; they’ve challenged these trusts in the past and have never officially sanctioned them
- Losses from poorly performing assets could be magnified in this type of trust
How do intentionally defective grantor trusts work? Here is a brief overview of one way they can be used:
- A trust is created, and then you lend the trust money to buy your assets (i.e. securities, real estate, or a business interest)
- Typically the asset bought is one that is expected to appreciate significantly in value
- You receive interest payments for a set number of years in return for lending the trust money
- The lower the interest rate that you select for the trust to repay you, the more your heirs will benefit
- Depending on the maturity rate that you choose, interest rates right now run from between 0.83% to 3.67%
A knowledgeable estate planner can discuss the pros and cons of this type of trust, and determine how to best help you meet your goals.
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