The Summit Trust: A Complete Guide in Simple Terms
The Summit Trust ™ is a powerful estate planning tool designed to protect your assets, optimize your taxes, and provide financial security for your loved ones. Although it may seem complex, this guide will break down every detail in plain language, so you can understand how it works and why it might be the right choice for your estate planning needs.
What Is the Summit Trust?
The Summit Trust is a special kind of trust known as an irrevocable, non-grantor, complex, discretionary, spendthrift trust. Let’s break that down:
Irrevocable: Once the trust is created, you can’t change it or take back the assets you put into it. This feature ensures the trust is permanent and provides legal and tax protections.
Non-Grantor: The trust is treated as a separate legal entity for tax purposes. This means it is not tied to your personal taxes, helping you save on taxes.
Complex: This trust can hold a variety of assets, from real estate to investments, and can manage them in a sophisticated way to meet your goals.
Discretionary: The trustee (the person managing the trust) has the flexibility to decide when and how to distribute money to the beneficiaries (the people or entities who benefit from the trust).
Spendthrift: The trust includes provisions that protect the assets from being misused by beneficiaries or taken by their creditors.
How the Summit Trust Works
1. Establishing the Trust
The trust starts when a third party (called the Settlor) purchases assets from you using promissory notes and transfers those assets into the trust. After the assets are transferred, the Settlor resigns, and the trustee assumes full management of the trust. These assets are now owned by the trust, not the Settlor.
2. Choosing Trustees
The Settlor appoints one or more trustees to manage the trust. The trustee’s job is to make decisions about the trust’s assets, following the rules laid out in the trust agreement.
3. Role of the Trust Protector
The Summit Trust has a unique feature: a Trust Protector. This person oversees the trustee to ensure they follow the trust’s rules and the Settlor’s wishes. The Trust Protector can also make certain changes if laws or circumstances change.
4. Selling Assets to the Trust with Promissory Notes
One of the key features of the Summit Trust is that assets are often sold to the trust using promissory notes. Here’s how it works:
You sell highly appreciated assets (like real estate or business interests) to the trust in exchange for a promissory note.
The trust agrees to pay you back over time, using the income or appreciation of the assets it now owns.
This strategy allows you to defer capital gains taxes while removing the assets from your taxable estate.
Example 1: Imagine you own a rental property worth $1 million with a $500,000 capital gain. Instead of selling the property outright and paying taxes on the gain, you sell it to the Summit Trust. The trust issues a promissory note agreeing to pay you $1 million over 10 years, while the property’s future appreciation and income benefit the trust and its beneficiaries.
Example 2: You own shares in a family business. By selling the shares to the trust for a promissory note, the business can continue to grow under the trust’s ownership, while the payments you receive from the note provide liquidity for your personal use.
5. Distributing Assets
The trustee uses their discretion to decide how and when to distribute money or other assets to the beneficiaries. For example, they might give money to a beneficiary for education, healthcare, or other needs.
Key Features and Benefits
Asset Protection
The trust’s spendthrift provisions ensure that creditors cannot take the trust’s assets, even if a beneficiary faces lawsuits or debt problems.
Assets in the trust are also shielded from being claimed during divorces or other legal disputes.
Tax Efficiency
Since the Summit Trust is a non-grantor trust, it separates the trust’s income and taxes from the Settlor’s personal taxes. This can lower overall tax liabilities.
The trust can use strategies like deferring capital gains taxes and distributing income to beneficiaries in lower tax brackets.
Flexible Management
The discretionary power given to trustees allows them to adapt distributions to meet the specific needs of beneficiaries. For instance, they can prioritize distributions for education or healthcare while holding back funds if a beneficiary is not financially responsible.
Long-Term Wealth Preservation
The trust is designed to grow and protect assets over time, ensuring they remain available for future generations.
Common Uses of the Summit Trust
Wealth Protection
Protecting family assets from lawsuits, creditors, and other risks.
Tax Planning
Reducing estate taxes and income taxes by moving assets out of the Settlor’s taxable estate.
Business Succession
Ensuring a smooth transition of business ownership to heirs while maintaining financial stability.
Charitable Giving
Creating a legacy by supporting charities while enjoying tax benefits.
Medicaid Planning
Shielding assets to help qualify for Medicaid benefits while keeping resources available for heirs.
How Are Assets Managed in the Summit Trust?
Real Estate: The trust can buy, sell, lease, or improve real estate properties. Trustees ensure these decisions align with the trust’s goals.
Investments: Trustees can manage stocks, bonds, and other investments to grow the trust’s value.
Business Interests: The trust can own and manage businesses, ensuring they remain profitable and sustainable.
Personal Property: Assets like jewelry or artwork can also be part of the trust.
Frequently Asked Questions
Who Should Consider the Summit Trust?
The Summit Trust is ideal for individuals with significant assets, complex family dynamics, or concerns about asset protection and tax efficiency. It’s especially beneficial for:
High-net-worth individuals.
Business owners.
Families with young or financially inexperienced beneficiaries.
What Are the Tax Benefits?
Income taxes are separated from your personal taxes, reducing overall tax burdens.
Assets removed from your estate are not subject to estate taxes.
Capital gains taxes can be deferred using strategies like promissory notes.
Can the Trust Be Changed?
Although the Summit Trust is irrevocable, the Trust Protector can make certain adjustments if laws change or if necessary to fulfill the trust’s purpose.
Conclusion
The Summit Trust is a comprehensive and flexible tool for protecting your assets, minimizing taxes, and ensuring financial security for your family. While it may seem complex, it’s designed to adapt to your needs and provide lasting benefits for generations. If you’re ready to explore how the Summit Trust can help secure your legacy, our team at Cutler | Riley is here to guide you every step of the way. Contact us today to learn more.