RESOURCES

Trusting a Trust

By David J. Depinto, ESP, CPA, MST
http://www.larypc.com/attorney.phtml?AttorneyID=1028

Trusts have long been associated with the super wealthy as a mysterious legal way to create family dynasties or to hide assets. In reality, a trust has multiple purposes and can be used as a planning technique for most anyone.

A trust is a legal relationship in which the legal ownership of property is separate from the beneficial ownership.

• The trustee is responsible for holding and investing money or other assets for the current or future benefit of another person(s), called the beneficiary(s).
• The person who contributes the assets and creates the trust is called the “grantor.”
• The terms and conditions of a trust, as dictated by the grantor, are stated in a written document called a trust agreement.
• A trust can exist without a written trust document. It can be created by mere intent or by the actions of two or more parties, which is sometimes called a “constructive” trust.

A trust agreement…

• Names the grantor, trustee and beneficiaries;
• Describes how the assets of the trust are to be managed and invested;
• Lists who is entitled to distributions of assets from the trust;
• Determines what restrictions are placed upon distribution to beneficiaries;
• Includes what ages or under what circumstances the beneficiaries will receive their shares; and
• States the purpose of the trust (i.e., to pay for the education of children).

Distributions of trust assets may be split between income and principal. For example, a common arrangement is for one beneficiary to get the income from the trust during his or her lifetime (i.e., a spouse from a second marriage) and the principal if the trustee decides it is needed for some purpose specified in the trust document. And remaining principal is distributed to someone else (i.e., children from a prior marriage) upon the death of the income beneficiary.

A trust can take any one of the following forms:

• Revocable Trust—sometimes called a “living trust,” it can be amended or terminated at any time by the grantor. Its most common purpose is to avoid probate upon the death of the grantor.
• Irrevocable Trust—used primarily to transfer assets to children or grandchildren with the intent of saving taxes. Once created, the terms and conditions of an irrevocable trust cannot be changed and the transfer of assets to that trust cannot be reversed without court intervention.
• Inter Vivos Trust—created and funded while the grantor is alive.
• Testamentary Trust—takes effect upon death of the grantor and its terms are stated in a last will and testament, as opposed to in a separate agreement.

Some examples of how trusts are used:

• Estate planning to avoid or reduce estate and inheritance taxes (Irrevocable Trust only)
• Avoid probate, avoid ancillary probate on out-of-state assets or protect assets from potential disability (Revocable Trust)
• Shield elder estates from Medicaid attachments as a result of disability and old age should nursing home care be required (Irrevocable Trust only and 5-year look-back period)
• Protect children’s inheritance from the consequences of their own marital breakups, poor business decisions or creditor problems (usually Testamentary Trust)
• Provide for children (or grandchildren) until they are mature enough to handle their own affairs (usually Testamentary Trust)
• Reduce income taxes (Irrevocable Trust and under limited circumstances)
• Delegate an independent trustee for investment and asset management
• Provide for a mentally, emotionally or physically handicapped child (Irrevocable—Supplemental Needs Trust)
• Ensure that assets go to the right people, at the right times, for the right purposes and in the right amounts without court-appointed custodians and guardians
• Gift a primary residence or vacation home to save gift and estate taxes and still retain the rights to live there (Irrevocable—Qualified Personal Residence Trust)

A properly planned and carefully drafted trust can be one of the most beneficial methods of holding, managing and transferring property. There are an unlimited number of uses for trusts in today’s complex and litigious society. Anyone considering planning for their future or the futures of their heirs should consider the many ways that a trust can benefit them and their families.

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