Following is information on a new estate planning tool that will address the long-term care needs and legacy planning of families.
The Parental Protection Trust (PPT) allows children of elderly parents to donate funds into a trust that will be set aside for future use of the parents. These funds are then preserved until the parent’s death. Upon the death of the children’s parents, all remaining assets are distributed back to the children. The PPT is designed as a 3rd-party Supplemental Needs Trust (SNT). It is to be established by children for their parents, however it may be established by anyone for anyone else.
1) When would it be appropriate to use a Parental Protection Trust?
a. If needed, the children might have excess resources that they would like to put aside for their parents' care when an elder law plan includes outright gifting to children. The PPT facilitates this. Additionally, under the right circumstances, when parents are insurable, the trustees may choose to invest trust funds in a life insurance policy with an indemnity long-term care rider. This technique can present significant benefits to the parents and children.
2) Is the life-insurance benefit taxable to the trust?
a. Life insurance benefits are not taxable to the trust, under IRC 101(a)(1).
3) If the long-term care rider benefit is triggered, is the benefit taxable?
a. If the long-term care rider benefit is triggered, the benefit is not taxable if it is an indemnity benefit. IRC 101(g)(1)(B) excludes from income "any amount received under a life insurance contract on the life of an insured who is a chronically ill individual."
4) Who is taxed on the income generated by the PPT assets?
a. The children are taxed on the income proportionately since the trust is structured as a grantor trust as to the children even if the income is distributed to the parents.
5) Are transfers to the trust by the children subject to gift tax?
a. Transfers to the trust by the children are not subject to the gift tax as the trust is designed so that gifts to the trust, by the children, are incomplete for gift-tax purposes.
6) Are the assets of the PPT included in the parent's estates?
a. Assets of the PPT are not included in the parents' estates as the parents are not contributors to the trust. There are additionally no powers given to the parents that would cause estate inclusion.
7) Are the assets of the trust included in the children’s estates?
a. While assets of the trust are not included in the parent’s estates, they are included in the children's estates. Children contribute assets to the trust and retain powers (such as a lifetime and testamentary power of appointment). This will include the assets in their estates proportionately.
8) Who are the remainder beneficiaries of the Parental Protection Trust?
a. Finally, the remainder beneficiaries of the PPT are the children who establish the trust. They receive a proportionate share at the last parents' death.
Santaella Legal Group, APC provides estate planning, elder law, litigation legal services for San Ramon, Danville, Pleasanton and Dublin, as well as the entire bay area.
If you would like more information on the Parental Protection Trusts, please contact Ivette M. Santaella, of Santaella Legal Group, APC at (925) 831-4840.