A “Trust” is a legal relationship where the legal title of property is held by one or more persons, who are obligated to convey, apply or deal with such property for the benefit of another person. A “Trust” consists not only of property, but also the Trust document/instrument, the Trust’s beneficiaries, and the trustee, and the Trust administrator.
“Trusts” are intricate and complex estate planning documents. It is crucial for you to have the guidance, supervision, and legal expertise of a qualified estate planning attorney prior to creating a “Trust”. Our firm recommends “Trusts” as effective estate plans for many clients. However, we recommend “Trusts” only to those clients who truly need a “Trust” to accomplish their estate planning goals. In fact, many times, clients’ estate planning wishes may be more effectively achieved through less complicated means.
Definition
The general legal definition of a trust may be confusing: a property interest held by one person (the trustee) at the request of another (the settlor) for the benefit of another third-party (the beneficiary). In more simplistic terms, the property owned by the settlor (you!) is transferred to a trust. The settlor designates a trustee to control, manage and maintain the property that is to be transferred. According to the words of the trust, the trustee only has certain powers over the property, and the trustee must eventually give the property to the beneficiaries who were originally selected by the settlor.
Practice Point: A trust is a complicated estate planning tool. When designed properly and legally, a trust may save you significant amounts of money by avoiding probate and excessive estate taxes. However, every person must be warned that trusts are complex and personal estate planning tools – thus, trusts are not intended for everyone and are not suitable for many estates. There are numerous and endless media advertisements about the many benefits and total simplicity of trusts. Unfortunately, these ads are incorrect, misleading, and ultimately they may lead to disastrous estate planning consequences once the settlor has passed on. We recommend that you should seek the legal advice and guidance of an experienced attorney prior to the implementation of any estate planning tool.
Purpose
A “Trust” serves many purposes for financial planning, family planning, investment strategies, and avoiding future legal problems.
“Avoidance of Probate”
A trust may be used as a substitute for a Last Will & Testament. The benefit of a trust, as opposed to a Will, is that a trust is not included in the settlor’s probate estate; therefore, the trust document is not usually public record for anyone to see. Furthermore, a trust may have a complex system or scheme of disbursements, interest accrued, etc. that allows for the certainty of distribution to be determined by the settlor prior to death.
“Control”
Through the use of a trust, the settlor may maintain extensive control over the trust property and assets. This is true even after the settlor has passed on. Through the designation of a trustee and an elaborate trust division scheme, the settlor maintains all aspects of control; including (but not limited to) partial and specifically timed monetary disbursements, specified use of property, achievement standards prior to monetary disbursements, and many others. It is important to note that depending on the intricacy of the trust, the settlor may maintain control of his or her assets for the welfarer of recipients well after his or her death.
“Financial Management”
By creating a trust, the settlor is able to receive expert financial and fiscal management of his or her assets during lifetime and after death. The trust design and structure may allow the settlor to achieve advantageous asset management, diverse financial plans, progressive financial investing, and market diversification. Furthermore, the settlor may dictate the management of all trust funds and assets for future financial gains for the trust itself.
“Flexibility for Future Needs “
Once a trust is created, the settlor may reserve the right to alter the trust terms, conditions, or management. Thus, the trust may be changed or altered to accommodate unforeseen future circumstances. The settlor and the trustee may make decisions as future events unfold
Types
We prepare various types of Trusts to help you with your individual estate planning needs. As previously stated, Trusts are complex and intricate estate planning tools. Therefore, we help you determine what type of Trust is best for your current and future needs.
An “accumulation trust” is a trust in which the trustee must accumulate all trust assets, profits and sales for future distribution to the beneficiary when the trust is set to distribute or terminate.
An “active trust” is a trust in which the trustee has some additional “active” or affirmative duty, obligation, or management of trust assets, other than simply distributing the trust to the beneficiary.
An “annuity trust” is a trust by which the trustee must pay a certain amount of trust monies to the beneficiary every year for the beneficiary’s life or other designated term of years. After the trustee has paid the beneficiary in full, the trustee must then either transfer the remaining trust monies to a qualified charitable trust or retain the trust monies for such charitable use.
A “bypass trust (a.k.a. Credit-Shelter Trust)” is a trust into which the settlor’s estate passes into at death so that the surviving beneficiaries get a life estate in the trust, instead of the property itself. This trust is a popular device to avoid estate taxes on an estate larger than the tax-credit-sheltered amount (currently $2,000,000.00).
A “charitable trust” is a trust that is created to benefit a specific charity, a group or class of charities, or to benefit the public at large.
A “Rummey Trust” is a trust by which the settlor retains a significant amount of control over the trust property and assets, so that the settlor is not taxed on the trust’s income.
A “custodial trust” is a trust by which the trustee manages the trust property in the event of the disability, incapacity, or incompetency of the primary beneficiary. This type of trust is usually used by elderly property owners and those persons who wish to have a will substitute to avoid probate in disposing of the trust property when the primary beneficiary dies.
A “discretionary trust” is a trust by which the trustee retains the sole discretion as to whether or not and how much of the trust property or the trust income shall be distributed to the beneficiary, if at all.
An “estate trust” is a trust by which all or a part of trust income is to be accumulated during the surviving spouse’s lifetime and added to the trust property. Ultimately, the accumulated income and trust property shall be paid to the estate of the surviving spouse at their death. This type of trust is commonly used to qualify property for the marital deduction in estate tax planning
A “fixed trust (a.k.a. Directory Trust)” is a trust by which the trustee may not exercise any discretion over the trust management, distributions, characteristics, etc.
A “governmental trust” is a trust that is a type of charitable trust established to provide a community or township with facilities and services ordinarily provided by a governmental agency; such as a municipality. The trust must promote purposes that are sufficiently beneficial to the community or township to justify the trust property to be continually used for that purpose.
An “insurance trust (a.k.a. Life Insurance Trust)” is a trust that has its primary property and assets consisting of insurance policies or insurance proceeds.
An “irrevocable trust” is a trust that after its creation, may not be altered, terminated, or extinguished by the settlor.
A “living trust (a.k.a. Inter Vivos Trust)” is a trust that is created and remains in effect during the settlor’s lifetime.
A “pension trust” is a trust that is created by an employer for the benefit of the employer’s employees. Usually, a pension trust exists when the employer transfers monies to a trustee in the amounts sufficient to cover the benefits payable to the employees.
A “pourover trust” is a trust that receives property from a Will upon a testator’s death. A pourover trust must be created during the settlor’s lifetime (a living trust). See also, a pourover Will under the “Wills” section.
A “QTIP trust” is a trust that is established to transfer assets between spouses when one of the spouses dies. The assets to be transferred – referred to as the qualified terminable interest property (QTIP) – are considered part of the surviving spouse’s estate and are therefore not taxable as property of the deceased spouse’s estate, thus eliminating the estate tax on the first deceased spouse’s estate.
A “revocable trust” is a trust by which the settlor retains the right to terminate, alter, and amend the trust and recover all or any portion of the trust property or any undistributed income.
A “spendthrift trust” is a trust that prohibits a beneficiary’s creditors from reaching any of the trust property, income, or assets designated for that beneficiary. A spendthrift trust also prohibits the beneficiary from assigning their interest in the trust to any other person.
A “testamentary trust” is a trust that is created by Will and becomes effective upon the date of death of the settlor. A testamentary trust is the exact opposite of a living trust.
Creation and Procedure
To create a valid and legal trust there must be a transfer of assets and property to the trust. The settlor must intend to create the trust and by executing documents of transfer (deeds, titles, and contracts), the settlor’s intent on creating a trust is confirmed.
A crucial aspect of creating a trust is creating title to trust property. In other words, any property that you hold in your name alone is NOT trust property. The settlor must take affirmative steps to change the ownership and title to property so that the property is held by (or “owned”) by the trust. For example, if you want your home to be included as trust property, you must change the deed to your home to reflect the change in ownership; your home is no longer owned by you as an individual, but rather the home is owned by your trust. In short, transferring of your assets is a tricky and complicated procedure; thus, it is always best to have an experienced estate planning attorney to assist you in creating a complete, valid, and effective trust.
Trusts & YOU
When and why would YOU need a trust?
The creation of a trust is a complicated matter. The factors that determine whether or not a trust is the correct estate planning tool for you vary from the size and value of your estate, the distribution scheme you wish to have for your assets, the number of persons you wish to distribute your estate to, the amount of estate taxes your estate may be subject to, additional safeguards or distributions schemes you may wish to impose, as well as numerous other factors. Whether a trust is the correct estate planning tool for you would be discussed with your experienced estate planning attorney. Many times, clients believe that they need an elaborate trust in order to effectuate their estate plan; however, your experienced attorney can save you time and money by using alternative estate planning tools to achieve your goals.