First Covenant will act as trustee for nearly all types of trusts, including those in the examples that follow.
Revocable Living Trusts
A revocable living trust is a trust which provides for the orderly transfer of the grantor’s wealth to beneficiaries, usually upon death. If properly drafted and funded, the revocable living trust saves the grantor’s estate the cost of probate. First Covenant can serve as trustee during the grantor’s disability (as “disability trustee”), or after the grantor’s death (as “administrative trustee” or “death trustee”) to ensure neutrality, professionalism and proper care for the assets.
A testamentary trust is one created in a testator’s will. Sometimes known as a “trust under will,” these trusts are established and funded as part of the probate process. The function can vary widely depending on the terms of the will.
These trusts assure the continuity of wealth transfers to future generations without payment of estate and transfer taxes. South Dakota law allows trusts of unlimited duration because the South Dakota legislature has abolished a law known as the Rule against Perpetuities. The recent expansion of the federal estate tax exemption amplifies the opportunity provided by Dynasty Trusts.
Asset Protection Trusts
These are primarily designed to protect the grantor or the trust owner from its creditors. The grantor may retain certain rights of payment of income and possibly earn estate savings or federal gift tax savings if structured properly. They are useful for medical and dental professionals, executives, business owners and other individuals subject to potentially costly lawsuits. These are also useful for pre-nuptial planning. South Dakota is one of the jurisdictions with the most favorable domestic asset protection trust law and broadest protection of discretionary trusts.
Charitable Remainder/Charitable Lead Trusts
These trusts provide a federal tax benefit to the trust’s creator (called a grantor) upon transfer of appreciated assets. The assets placed in the trust pay income to non-charitable beneficiaries (possibly including the trust’s creator) for a specified period of time. The remainder is then donated to charity (often after the death of the grantor). The name means the charity gets the “remainder” interest. The grantor is given a current income tax deduction for the transfer of an asset to the trust. This is particularly beneficial for assets that have a very low cost basis.
Much like a charitable remainder trust, a charitable lead trust provides that trust assets pay income to charity for a specified period of time, and the remainder to non-charitable beneficiaries, such as the grantor’s family. The name means the charity gets the “lead” interest.
Grantor Retained Annuity/Unit Trusts, Qualified Personal Residence Trusts & Intentionally Defective Grantor Trusts
These trusts use the current low interest rates and mismatch between trust taxation and income taxation to provide advantages to clients with current assets that are anticipated to appreciate significantly in future years.
Irrevocable Life Insurance Trusts
Also known as ILITs, these are often used by grantors who will need liquid assets upon their death that are not includable in their estate, often to pay transfer taxes. We will administer irrevocable life insurance trusts, issue Crummey letters, monitor and review the life insurance policies.
Credit Shelter Trusts
Also known as bypass trusts, these trusts were used to take advantage of both estate tax exemptions for a couple. These may become rare given the new federal exemption is portable. However, state transfer tax issues may necessitate the continued use of these trusts. First Covenant understands these issues and, with a well drafted document, can work with the client’s other advisors to effectively fund and administer the trust to achieve the desired tax advantages.
Often used in second marriages, these trusts typically provide for a surviving spouse during his or her lifetime, while preserving the principal for the deceased spouse’s children or other beneficiaries. Utilizing a professional fiduciary such as First Covenant Trust can help to minimize friction and provide a buffer between current and remainder beneficiaries.
Qualified Domestic Trusts
These are used to utilize tax planning opportunities related to the marital deduction for non-citizen spouses, and require a US fiduciary. First Covenant can serve in that role as trustee or co-trustee with a surviving spouse beneficiary.
2503(C) Minor’s Trusts
These are used to transfer assets in trust for the future use of beneficiaries who are currently under the age of 21, while still utilizing the annual exclusion. The annual exclusion for transfers to trust is generally unavailable if the beneficiary of the trust only has a future interest in the property. A properly drafted 2503(c) trust is an exception to this rule. First Covenant Trust and Advisors, LLC can act as trustee of a 2503(c) trust to ensure that the trust assets are not included in the donor’s estate.
The above are provided as representative examples only. First Covenant will serve as trustee of nearly any type of trust, whether inter vivos or testamentary. Further, First Covenant will serve as co-trustee with others. This arrangement may be preferable in certain situations to achieve the right balance between a related trustee and a professional fiduciary.
Trust Modification & Trust Situs Planning
First Covenant is equipped to administer trusts which have situs (or legal location) in any state. We also recognize that some jurisdictions provide distinct advantages over others in certain areas of the law. We can work with your team of advisors in the planning stages to choose the optimum situs for a proposed trust. Working with your team, we can, in certain circumstances, work to modify trust terms of existing trusts. This may be desirable for a variety of reasons, such as a change in family circumstances, change in business, regulatory or tax environment, or to take advantage of another state’s trust law.