Testamentary giving and other trust options

Testamentary giving plans

Some individuals build testamentary giving plans from an existing lifetime giving strategy. Others choose to hold off on giving until after death to ensure they won't deplete assets during their lifetime. In either case, simply declaring gifts in a will may not always be the best strategy—and there may be other options. An attorney or tax advisor can help an individual consider all options given their specific situation:

  • Tax management
    Some testamentary gifting strategies may help reduce the size of a decedent's taxable estate, while potentially reducing income taxes or other tax bills that the decedent's heirs might owe upon inheriting assets.
  • Family needs
    Different types of trusts, or provisions within trust documents, can address unique situations, such as gifting to minor children or protecting assets for future generations in case of divorce or debt. Trust provisions also allow donors to specify how beneficiaries may use assets, such as for education or medical needs.
  • Optimizing assets
    A good plan can establish the right gifting structure to manage assets subject to unique rules, such as inherited IRAs or highly appreciated assets.

Giving to family

Depending on a family's needs, the following trusts may help create a testamentary giving plan for a decedent's children, grandchildren, and future generations:

Irrevocable life insurance trusts (ILITs)

ILITs are trusts designed to hold life insurance policies, and are commonly used to help families manage estate taxes. The death benefit from a life insurance policy typically is included in an insured's taxable estate—and if the benefit is significant, that payout could result in a larger estate tax bill. However, if a life insurance policy is owned by an ILIT, it is not treated as part of the insured's taxable estate. Cash gifts made during the insured's life can be used to cover premiums. Upon the insured’s death, the trust would receive the policy proceeds for management and distribution. Besides reducing estate taxes overall, they may possibly be used to provide funds that heirs can use to cover estate tax bills if an estate is largely composed of illiquid assets.

Generation-skipping trusts (GSTs)

GSTs let individuals take advantage of the generation-skipping transfer tax exemption ($12.06 million in 2022). By naming grandchildren, or future generations, (in lieu of children) as final remainder beneficiaries, the individual may pass assets to future generations while preventing them from being included in their children's estates.

In addition, a GST may shield assets from financial hardships that could potentially befall the children, such as debt, divorce, or lawsuits. Even though the donor's children would not take possession and ownership of the assets, it does not mean they cannot benefit from them. The trust can even include provisions that allow the children to benefit from income generated by the assets, as well as principal for needs, while preserving the bulk of the principal for future generations.

Dynasty trusts

These trusts are a long-term variation on a GST, typically used by very wealthy families to preserve a legacy for future generations. Currently, in most states, applicable law mandates that such trusts must expire 21 years after the death of the youngest beneficiary alive when the trust is created. But some states have eliminated this "rule against perpetuities" allowing for dynasty trusts that last for multiple future generations—which provides decades of potential tax-sheltered growth for heirs.

Gifting to charities

Many individuals also want to create a charitable legacy through their testamentary giving plan. Common charitable giving trusts include:

Charitable remainder trusts (CRTs)

These special trusts allow the donor to benefit from their assets, while earmarking a significant gift for the charitable organization of the donor's choice upon death. After placing assets into a CRT, the donor can draw an annual stream of income from that trust for the remainder of their life. Then, upon death, whatever assets remain in the trust pass to the charitable organization named as the beneficiary.

Many individuals may qualify for an income tax deduction in the year in which they make the gift. Any growth of the assets in the trust will generally be tax-free and eventually pass to the chosen charity or charities with no tax owed. As a result, CRTs are especially useful for highly appreciated assets, such as stocks. After transferring, the shares can be sold with generally no tax consequences and the proceeds diversified into a new mix of assets, which can provide a steady stream of income and a large future gift for the charity of the donor's choice.

Charitable lead trusts (CLTs)

A CLT allows the donor to designate charities to receive an income stream during the term of the trust. These trusts reverse the arrangement of a CRT. Donors gift assets to a CLT to provide a stream of annual payments to the charitable organization of their choice for a term of years. After the term expires, the remaining assets will pass from the trust to their chosen beneficiaries.

Because of this arrangement, these trusts are generally best suited for individuals who have more than enough income to live on and can forgo the lost cash flow from certain assets. CLTs also combine the 2 sides of a giving plan in a unique way. They allow donors to support the charities of their choice during their lifetime, while preserving assets for their heirs' inheritance.

Fidelity does not provide legal or tax advice. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Fidelity cannot guarantee that the information herein is accurate, complete, or timely. Fidelity makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation.

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