Several options exist for parents who want to delay the distribution of assets to their children. Choosing the right option should be based on 1) the type of support you want to give your children, 2) how long you want to give that support, and 3) how you want to contribute funds. Here are five options:
Revocable Trusts: The donor (e.g., parent) can modify or terminate the trust until he/she dies. The parent can choose the trustee, designate beneficiaries and determine distribution standards (e.g., age when the child receives money from the trust).
Irrevocable Trusts: The donor gives up the right to control assets once the trust is established. The donor may select a trustee to manage trust assets, designate beneficiaries and define distribution standards.
Charitable Lead Annuity Trust (CLAT): An irrevocable trust which distributes funds to a charity for a set number of years. Afterwards, what’s left in the trust goes to the beneficiaries directly or in a continuing trust. If assets in the CLAT appreciate, donors can take advantage of a gift or estate tax exclusion.
Intentionally Defective Grantor Trust (IDGT): An irrevocable trust that allows the donor to pay income tax on a trust asset that beneficiaries will receive. This is a great option for assets with high future growth potential which is why it is often called “a gift that keeps on giving”. Distribution can be delayed for years and be tailored to the donor’s discretion.
Grantor Retained Annuity Trust (GRAT): An irrevocable trust that requires fixed annual payments to the grantor for a specified time period. When the trust expires, the remainder of the trust is paid to the beneficiary directly or into another trust. Excess appreciating assets are transferred with little, if any, gift tax.