What is a Trust? A Trust is created when you transfer the financial benefit of property to a third party while keeping the legal ownership and control by appointing themselves, a financial institution or another individual as the Trustee. In short, a Trust is set up by a Grantor, managed by a Trustee, and benefits the beneficiaries. Separate people can hold each of these roles, or the same person can hold all three.
A Trust can help avoid the costs associated with owning property outright by increasing administrative convenience; sheltering the owner from lawsuits and creditors; allow for a speedier estate settlement; and, in some cases, reduce the tax burden at the same time. A Grantor can tailor a Trust to meet nearly all of their objectives. A Trust can also shift the burden of management to a Trusted third party, transfer properties to minors without the need to appoint a guardian, safeguard the inheritor’s principal against unwise or extravagant spending, and, as a retirement tool.
A Trustee can have as narrow or as broad a scope of powers as the Grantor desires, even with powers as broad as those available to the Grantor individually. A Grantor can also keep or give away powers as well. When the Grantor gives away the right to change the terms of the Trust, either during their lifetime or at their death, the Trust becomes Irrevocable. An Irrevocable Trust is generally immune from lawsuits and creditors’ claims against the Grantor, provided there is no fraud, while Revocable Trusts are not. Trusts are not subject to rules requiring testamentary proof, thus avoiding the necessity of probate and diminishing access to the decedent’s property against creditors’ claims. though it does not protect against state claims, such as estate taxation. Trust administration is not interrupted by the Grantor’s death minimizing any loss of income.
Creating a Trust
Whether the Trust is made for tax or non-tax purposes, only a properly written agreement can fulfill the intentions. The terms of the Trust should include the following:
• The identity of the individuals or institutions with fiduciary duties who act as the current and successor Trustee and specify provisions for the appointment of successor Trustees in the event of the death, resignation, or incapacity of the designated Trustees.
• The identity of the current and remainder beneficiaries.
• Description of initial Trust capital, authorize any additional contributions, and provide for the distribution of income and principal. Most people do not put all of their assets into Trusts because they want liquidity or convenience, or because they do not get around to it before death. A pour-over clause in a Will that references a previously established Trust “pours over” assets into the Trust.
• Sets the conditions under which the beneficiaries will receive income distributions from the Trust. The Trustees can be empowered either to distribute the income on a fixed schedule, at a fixed rate, or to sprinkle the income among the various beneficiaries as deemed appropriate.
• The Trustees’ specific powers in administering the Trust.
• Provides for the appointment of a guardian for beneficiaries who are minors.
• Safeguards against the transfer of the beneficiary’s interests to third parties, so that their interests cannot be subject to the claim of the beneficiary’s creditors.
• Specifies the Trust’s term or time limit.
• Provides for the payment or waiving of fees for the Trustee, and
• Provides for the bond or security or waiving of such bond and security for the Trustee.
The specific terms of the Trust depend on the specific objectives of the Grantor in creating the Trust.
Revocable Versus Irrevocable Trusts
Revocable Trusts are those Trusts where the Grantor retains the right to alter or even revoke the Trust. Since the Grantor retains full control over the Trust assets, there are often no tax advantages to the Grantor and are considered for nontax reasons. Irrevocable Trusts are those Trusts where the Grantor has given up some of their rights to control the assets in the Trust, to the extent that the Trust is considered a current gift to the beneficiaries, so the principal, and any future appreciation, is excluded from future estate taxes.
Testamentary Versus Living Trusts
A Testamentary Trust is one created by the probating of the deceased Grantor’s Will, while an intervivos, or living trust is created during the Grantor’s lifetime. A Testamentary Trust has certain advantages, but their major drawback is their inclusion in the probate process and estate tax assessment.
A Living Trust can achieve some of the advantages of the Testamentary Trust, as well as avoiding probate; If all of the Grantor’s assets are held in the Trust, there is nothing to transfer through the Will. The Trust can pay any remaining debts, and it ensures continuous management of the assets, uninterrupted by death. If the Grantor, at any point is disabled or otherwise unable to make an important decision concerning the assets, a Successor Trustee can take responsibility. The Grantor can appoint an adviser as co-Trustee if he or she does not wish to manage all of the assets while living. A Trust provides more assurance than a Will that the Grantor’s desires will be carried out; A Trust document can specify the exact conditions about the distribution of assets (eg, at what age a child will receive an inheritance), and can allow the Trustee the discretion to withhold or distribute extra assets if prudent or necessary.
Living Trusts usually take the form of a written agreement between the client and an individual or a bank that has agreed to take on the responsibility of property management. Often, the client will act as his or her own Trustee, at least as long as he or she is able to do so. Living Trusts can serve as a receptacle for estate assets and death benefits from employee benefit plans and insurance on the life of the Grantor. It can bring together in one location assets located in several states, and thus avoid administration of the estate in different places. The Trust is protected from public inspection, and may be less vulnerable to attack on grounds of the Grantor’s fraud, incapacity, or duress than a testamentary Trust.
Simple Versus Complex Trusts
A Simple Trust is a Trust that distributes all income in the year in which it is earned; does not have a charitable beneficiary; and, may or may not distribute principal. A Simple Trust pays taxes only on capital gains remaining in the Trust at the end of the year, while the beneficiaries are taxed on the income they receive.
A Complex Trust can accumulate income, has a charitable beneficiary, or can add income to its principal. A Complex Trust pays taxes on the income and gains that remain in the Trust at the end of the year.
A Trust may be simple one year and complex the next. All Trusts are complex in their final year, because all principal must be distributed when the Trust ends. A Trust permitted, but not required to distribute principal is complex in the years that it does distribute, but is simple in the years it does not. A Trust that can either distribute or accumulate income is always a Complex Trust, even in the years it does not actually make distributions.
A trust is a useful tool for tax planning and asset protection, but can be complex and confusing with the various types and the tax and asset protection consequences for both you and your beneficiaries now and into the future. Getting a basic understanding of what a trust is, and what the various trust do, can help guide you through the thickets of tax and asset protection planning. This field guide is a start toward your further understanding, but if you have specific questions, you should contact your estate planning professional.
Credit: www.forbes.com /