Part One of Two
People often associate trust funds only with the wealthy. But a trust fund or agreement actually can be an effective financial and estate planning tool for many people in many circumstances.
A Trust is a separate legal entity that holds property or assets for the benefit of a specific person, group of people or organization known as the Beneficiary. The person creating a Trust is the Grantor or settlor. When a Trust is established, one or more individuals or a corporate entity is designated to oversee, manage and invest the assets held in the Trust. This individual or entity is called a Trustee. A Trustee can be a professional with financial knowledge, a relative, a loyal friend, or a corporation holding trust powers. There are potential advantages and disadvantages to each type of Trustee arrangement. An individual Trustee may provide a more personal touch, but may die, move away or not have the investment and financial expertise needed. A corporate Trustee may be less personal in its dealings with the Beneficiaries but provides experience, investment skills, permanence and impartiality. Oftentimes, the appointment of more than one Trustee makes sense so that various attributes and abilities will be present in the administration of the Trust.
Benefits of Establishing a Trust
Whether it makes sense to establish a Trust depends on your individual circumstances. Some common reasons for setting up a trust include:
• To provide for minor children or family members who lack financial experience or who are unable to manage their assets;
• To provide for management of your assets should you become unable to oversee them yourself;
• To avoid Probate and provide for a more timely transfer of your assets immediately to your beneficiaries upon death; and
• To reduce estate taxes or provide liquid assets to help pay for them.
A number of these objectives may also be accomplished by use of a well-written Will. Check with an estate planning lawyer before deciding if a Trust is right for you.
Types of Trusts
There are two basic forms of trusts -- after-death (or testamentary) and living (or inter vivos). An after-death Trust will come into existence (usually under the terms of a Will) after a person's death. The assets used to fund this type of Trust must usually go through the Probate process.
An example of an after-death trust would be a mother leaving land under the terms of her Will to a Trust for the benefit of a young son. The Will establishes the Trust to which the land is transferred, and the Will provides the terms of the Trust and the duties to be performed by a Trustee. For example, the Trust property may be required to be held by the Trustee until the boy reaches a stated age, at which point the land is transferred to the son outright. In the meantime, the Trustee is responsible for upkeep of the property, payment of taxes and the rental or other use of the land. The use of any net rental income generated by the land (after payment of taxes and expenses) might also be subject to the Trustee’s decision whether or not to distribute it for education, health, support or other purposes for the benefit of the son (Beneficiary).
A Revocable (living) Trust, on the other hand, is a Trust made while the Grantor is still alive. The Grantor generally serves as the initial Trustee and may make changes to the Trust during his or her lifetime. Revocable Trusts can be used to avoid the sometimes lengthy or costly Probate process. However, this Trust provides no shelter for assets from federal or state taxes beyond what can also be provided for in a Will.
Likewise, a Trust set up by the Grantor during his or her lifetime may be an Irrevocable Trust. The Grantor is usually not the Trustee, and the ownership of assets is turned over to the third-party Trustee. The trust becomes, for tax purposes, a separate entity, and the assets cannot be removed nor can changes be made in the Trust provisions by the Grantor after the Trust has been signed. This type of trust often is used by individuals with larger estates to reduce estate taxes. For example, an Irrevocable Life Insurance Trust, if properly drawn and administered, can remove the entire value of all life insurance proceeds passing through it from death (as opposed to income) taxes.
DISCLAIMER: This article provides general coverage of its subject area. It is provided free, with the understanding that the author, publisher and publication do not intend this article to be viewed as rendering legal advice or service. If legal advice is sought or required, the services of a competent professional should be sought. The author and the publisher shall not be responsible for any damages resulting from any error, inaccuracy or omission contained in this publication.)