The Argot of Trusts, as Told in Acronyms

Monday, April 14, 2014

NING, Ding, Grat. Ilit, Crat, Crut, Qtip. And for those with short memories, Slats. [Source:]

Is this code? The output of a broken keyboard? No, they’re acronyms that are commonly bandied about when discussing trusts. Always a rarefied space, the world of trusts is now awash in Washington-style shorthand. Unlike with that alphabet soup of government agency jargon, spelling out the names of these acronyms does not necessarily make it clear what the trust does. A Grat, for example, is a grantor-retained annuity trust, but it has nothing to do with annuities or insurance of any kind.

“I know a lot of very sophisticated people who are intimidated by these very same acronyms,” said Daniel D. Mielnicki, head of wealth preservation at Berger Singerman, a Florida law firm. And that feeling, Mr. Mielnicki said, prompts a flight response. “When in doubt,” he said, “their response is going to be no.”

Saying no won’t hurt most people. After all, most people do not have the kind of wealth or complicated assets that require a trust. On the other hand, the people who could benefit from a Ning or a Crat may not realize what the risks are or how much money and time need to be put into creating one to make it worthwhile.

“These complicated trust structures are not for everyone,” said Suzanne L. Shier, wealth planning practice executive and chief tax strategist at Northern Trust. “You don’t want to overplan for someone. They need to understand the amount of planning that is appropriate for their wealth levels and planning goals.”

Once a relatively straightforward legal structure to hold and transfer assets among the generations, trusts have grown in complexity along with the tax code they can shelter assets from and the financial instruments and investment vehicles they hold. Yet their very complexity means they carry the added risk of scrutiny from the Internal Revenue Service or of just not working as planned.

“If there is a risk of an audit of tax returns, the client has to be aware of that,” said Gail E. Cohen, vice chairwoman and general trust counsel at Fiduciary Trust. “You need a very skilled practitioner doing your gift tax return.”

So what are these oddly named trusts and what do people who need them need to know?

Grats are a way to transfer the appreciation of an asset, above a currently small interest rate, to a beneficiary tax-free. They are often used for closely held businesses or stock in a company that is about to go public. Their power comes in having a duration as short as two years.

“What you need to do is identify two to three assets that will pop in value,” said Daniel L. Kesten, a law partner at Davis & Gilbert. “The perfect Grat investment is a $10 Mega Millions ticket. The Grat has to pay you back $5 for two years. If it wins $100 million, all but $10 will pass to children free of gift tax.”

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