Trusts

A trust is an effective estate planning tool to give property according to specific terms. Putting property in trust transfers it from your personal ownership to the Trust. The Trust has legal title to the trust property. The property can be any kind of property--money, real estate, stocks, bonds, collections, business interests, personal possessions and automobiles. A Trustee, which may be the Grantor, manages the property in the way specified in the trust. Trusts can be very simple, intended for limited purposes, or they can be very complex, making gifts two or more generations from the Grantor, and providing tax benefits and protection from creditors of the beneficiary. You can include any provision you want in a trust, as long as it doesn't conflict with state law. When you approach a lawyer to help you set up a trust, make sure he or she is willing to work with you to tailor the trust to your particular needs; otherwise flexibility is wasted, which is the primary benefit of trusts. It's another reason to avoid those prefabricated, all-purpose trusts you see in self-help books. A good lawyer will provide you with a financial analysis to show how much you might save over time by structuring your trust in certain ways. Make sure you choose a lawyer who's familiar with estate planning, trusts, and, if your trust is used for saving taxes, tax law. IRS regulations governing trusts change often, and the agency has always given trusts special scrutiny.

Benefits of establishing a Trust

There are many benefits to using a Trust estate planning. One of the most beneficial reasons to use a Trust is the privacy that it provides. Trusts do not go through probate so that your property is not made public record through probate. Further, trusts are generally more difficult to contest than wills. Another great reason to use a trust is because they provide flexibility. You can authorize how payments are made to your beneficiaries, allow extra withdrawals in case of emergency, and provide for a beneficiary's health, education, maintenance, and business endeavors. You can use trusts to impose discipline on the beneficiary. You could require the beneficiary to live within a set figure, getting a certain amount of income each year, regardless of inflation, need, or the stock market's effect on the principal

WHO NEEDS A TRUST?

If you have children and want to ensure they receive a good education you should consider setting up a trust. The trustee manages the property in the trust for the benefit of your children during their lifetime or until they reach the ages that you choose. Then any remaining property in the trust may be divided among the children. You can set up one trust that all the children can receive money or property from and leave it to the trustee's discretion to provide support to the children until a certain event occurs, such as when the youngest beneficiary reaches a certain age. A single trust allows the greatest flexibility to distribute the property unequally according to each child's individual need. The less money you have to distribute, the more likely you would put it all in one trust. Since there is a limited amount of money, you want to pool it to be sure that it goes for the greatest need. If an equal distribution to each child is your primary goal and there's plenty of money available to take care of each child's likely needs, then you may want to set up separate trusts for each child, to assure that each gets an equal share. You can specify that the trust pay for education, health care, food, rent, and other basic support. Given life's unpredictability, however, it's often better to give the trustee more discretion to decide if an expenditure is legitimate. Such a provision also gives the trustee flexibility. For example, if one of your children has an unanticipated expenditure, like a serious illness, the trustee could give him more money that year than the other children.

When should the assets be distributed?

Some parents pick the age of majority (18) or the age when a child will be out of college (22 to 25). If all the assets are in one trust that serves several children, you would usually have the assets distributed when the youngest child reaches the target age. If you have separate trusts and a pretty good idea about each child's level of maturity, you can pick the age that seems appropriate for each one to receive his or her windfall. If you don't know when each child will be capable of handling money, you can leave the age of distribution up to the trustee (and risk friction between the trustee and the children), have the trustee distribute the assets at different times (say, half when the first child turns 25 and the rest when the youngest does so), or just pick an age for each child, such as 30.

Trusts are especially popular among people with beneficiaries who aren't able to manage property well. This includes elderly beneficiaries with special needs or a relative who may be untrustworthy with money. A discretionary trust gives the trustee leeway to give the beneficiary as much or as little he or she thinks appropriate. Another type of trust for irresponsible beneficiaries is a spendthrift trust. It's simply a trust in which your instructions to the trustee carefully control how much money is released from the trust and at what intervals, so you can keep an beneficiary from the temptation of getting thousands of dollars in one stroke. You can stipulate that the trustee will pay only certain expenses for the beneficiary-- those you (or the trustee) consider legitimate, such as rent and utility bills. In a spendthrift trust the beneficiary cannot assign his or her interest in the trust, and creditors of the beneficiary can't get at the principal in a trust, but can make a claim (if it's otherwise legal) on whatever income the beneficiary receives. Spendthrift provisions raise a number of tricky questions and should be used cautiously.

Trusts help you transfer property that's not easy to divide evenly among several beneficiaries. Suppose you have a vacation home, and four children who each want to use it. You can pass it to them in a trust that sets out each child's right to use the property, establishes procedures to prevent conflicts, requires that when the property is sold the trustee divide the proceeds as you desire, and sets up a procedure by which any child may buy out another's interest in the cottage.

Through a trust, you can maintain more control over a gift than you can through a will. Some people use trusts to pass money to a relative when they have doubts about that person's spouse. For example, you love your son, but don't trust his wife. You're afraid she'll spend the money you give him on and shoes. Leave the money in trust for your son instead of making a direct gift to him, and you can direct that he get only the income, so neither he nor his wife can squander the principal. You can use a trust to ensure that your son's wife cannot get the money in the trust in the event of divorce. The trustee would have discretion to

Trusts are very useful to people with substantial assets, because they can help avoid or reduce estate taxes. For example, by establishing a trust for their benefit, you can make tax-free gifts (up to the limit allowed by law) each year to your children or grandchildren during your lifetime, even if they're minors. This will reduce your taxable estate and save taxes upon your death. A properly drawn trust may also reduce estate taxes by utilizing the martial deduction or avoiding the generation skipping tax.

Funding the trust

A testamentary trust is funded after your death, with assets that you've specified in your will and through beneficiary designations of your life insurance, IRA, and so on. Such trusts generally receive most of the estate assets, such as the proceeds from the sale of a house. Or you could set up an "unfunded" standby trust. This is a trust that could be called "minimally" funded to avoid confusion. It may have a nominal sum of money in it--$100 or so--to get it started while you're alive, but it only receives substantial assets when you die. Your pourover will would direct that many or all of your assets be transferred from your estate to the trust at your death. Life insurance payable to the trust, as well as designating the trust as the beneficiary of IRAs, profit-sharing plans, and so on, will pass these assets directly to the trust outside of probate. However, other assets not already owned by the trust when you die will have to go through probate. This is why many lawyers shy away from unfunded trusts, unless probate avoidance isn't the primary goal If your estate--with life insurance benefits included--will add up to more than the lifetime exclusion amount, you can save taxes by removing the life insurance proceeds from your estate and establishing an irrevocable life insurance trust that owns the policy; all incidents of ownership in the policy belong to the trust. When you die, the proceeds are paid into the trust, escaping estate taxation and creditors in so far as the insurance policy is concerned.

Trusts and taxes

However,there are a few basic principles worth mentioning here. While gifts under the lifetime exclusion amount (in a trust or in a will) escape federal estate taxation, the recipients of the trust income will still have to pay income tax when they receive income from the trust. They would not have to pay tax on the principal in the trust when they receive it . The trustee pays, out of the principal, the taxes on income from the trust that's reinvested or put back into the principal. Capital gains from the sale of stock, real estate, and the like are generally added to the principal unless you specify otherwise. The choice of trustee can affect the tax the trust owes. If the beneficiary is made the only trustee, some of the tax advantages of the trust can be lost. Similarly, the more powers the grantor retains, the more likely the assets in the trust will be taxable, either during the grantor's life as income tax or after death as estate tax.

KINDS OF TRUSTS

Charitable Trust

Charitable Trusts are created to support some charitable purpose. Often these trusts will make an annual gift to a worthy cause of your choosing, simultaneously helping good causes and reducing the taxes on your estate.

Discretionary Trust

A Discretionary Trust permits the trustee to distribute income and principal among various beneficiaries or to control the disbursements to a single beneficiary, as he or she sees fit.

Irrevocable Life Insurance Trust

Tax-saving trusts in which trust assets are used to buy a life insurance policy whose proceeds benefit the Grantor's beneficiaries.

Living Trust

A Living Trust enables you to put any assets in a trust while still alive.

Medicaid qualifying Trusts

are trusts that may help you qualify for federal Medicaid benefits by placing certain property in a trust, sometimes limiting your assets for Medicaid purposes. This device is mostly used when family members are concerned with paying the costs of nursing home care.

Revocable Trusts

A Revocable Trust is one that can be changed or revoked by the at any time by the Grantor.

Irrevocable Trust

An Irrevocable Trust cannot be changed or terminated before the time specified in the trust, but the loss of flexibility may be offset by savings in taxes.

Spendthrift Trust

A Spendthrift Trust can be set up for people whom the Grantor believes wouldn't be able to manage their own affairs--like an extravagant relative, or someone who's mentally incompetent. They may also be useful for beneficiaries who need protection from creditors.

Support Trust

A Support Trust directs the Trustee to spend only as much income and principal as may be needed for the education and support of the beneficiary.

Testamentary Trust

Testamentary Trusts are created by a person's last will and testament.

Paid on Death Accounts

Paid on Death Accounts are not really trusts at all. They're simply bank accounts that pass to a beneficiary immediately upon your death.

Disclaimer

The information on this website is for general information purposes only. Nothing on this or associated pages or documents should be taken as legal advice for any case or situation. The information on this website is not intended to create, and receipt or viewing of this information does not constitute an attorney-client relationship.