Articles for Financial Advisors

Upward Trusts

Upward Trusts

An adult child may want to consider funding an upward trust for a parent who needs income. The parent lives off the income and may or may not have access to trust principal, depending upon trust document wording. Ideally, when the parent dies, the ultimate trust beneficiary is the adult child’s loved ones. If assets in the upward trust eventually revert to the grantor (adult child), such assets could subject the grantor’s estate to taxes—assuming the $5.25 million limit (2013) is surpassed. 

There is a tremendous amount of flexibility with trusts, including upward trusts. The creator of the trust (referred to as a “grantor” or “trustor”) can also be the trustee or use someone else to protect the parent and trust assets by deciding: [1] what the trust can invest in, [2] who gets distributions of income and/or principal and when, [3] what expenses or requests are to be allowed, [4] who pays income tax on trust assets (the income beneficiary, such as the mom or dad, or the grantor), and [5] who receives trust assets once one or both parents dies.
Two possible concerns with an upward trust are: [1] being ineligible for certain government programs and [2] making sure the generation-skipping tax is avoided. Since income or assets are being distributed to the parent, government-assisted income programs could be in jeopardy. This becomes an issue if the parent has the option of taking income or principal from the trust or the trust requires mandatory distributions. 
The generation-skipping tax is not an issue if trust assets revert to the grantor or go to loved ones who are only one generation away from the grantor. The generation-skipping tax is a flat 40% above the $5.25 million exemption for 2013.

Previous Post

For Advisors by Advisors. Browse all Programs.