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How is a Trust created?
A
trust is created by the transfer of property by its owner (called the
settlor) to a trustee who holds the property for the benefit of another
person or persons (called beneficiaries).
The
settlor transfers assets into the name of the trustee of the trust.
Assets can include land, houses, bank accounts, stock accounts, and
other assets; these then pass automatically to the trust's beneficiaries
when the settlor dies. When the settlor acquires additional assets, he
can title those in the name of the trustee of the trust and add them to
it. Some forms of assets can simply be listed in a document added to the
trust document; title to real property must be formally recorded.
Upon
the death of the settlor, a successor trustee who is chosen by the
settlor and named in the trust (this could be one or more of the
beneficiaries, a trusted friend, a bank or attorney) takes over as
trustee. The trustee is obligated to follow the instructions of the
settlor set forth in the trust concerning the distribution of property
and the payment of taxes and expenses.
Like
both marriages and wills, a trust that is correctly set up in one state
remains valid if the person creating the trust moves to another state.
Property from more than one state can be included in a trust.
What is a revocable intervivos/living trust?In
a revocable trust, the settlor or grantor (who funds the trust) retains
control of the property and can end the trust and take back the assets
at any time. The person establishing the trust is often – at the same
time - the settlor, the initial trustee, and the beneficiary of the
income of the trust until his or her death. At death, the trust becomes
irrevocable and the property in the trust passes to other beneficiaries.
One advantage of a trust established in the lifetime of the settlor is
that any property held in it is not part of the probate estate and
passes directly to the beneficiary at the settlor’s death. A trust
established when the settlor is alive is called an intervivos trust.
Because an intervivos trust is not probated, the terms of the trust can
remain private.
What is an irrevocable trust?In
an irrevocable trust, the settlor gives up ownership and control of the
property placed in the trust. One result of this choice is that assets
placed in an irrevocable trust may not be included in the settlor's
estate at his or her death. The trust pays tax on its accumulated
income, but current distribution or payment of income to beneficiaries
is deducted.
What is an A-B trust?A-B
or "credit shelter" trusts are particularly suited to spouses whose
combines assets exceed the exclusion amount for federal estate taxes -
in 2011, this excluded amount is $5,000,000. Having
an A-B trust enables a married couple to double the amount excluded
from estate taxes at death to $10 million. Such trusts are often
favored by couples with children in a second marriage who wish to
provide support for the surviving spouse, but also want to protect
assets for the children of each marriage. In an A-B trust, the couple's
assets are held in one trust until one spouse dies. After the first
spouse dies, the trustee creates two trust shares, an A trust
(survivor’s trust) and a B trust (decedent's trust). These assets are
not included in the surviving spouse's estate for determining estate tax
liability, yet the surviving spouse may be able to use the B trust’s
income and even part of its principal if the trust is so written and
there is need. The B trust becomes irrevocable upon the death of the
first spouse, and the surviving spouse cannot change the beneficiaries
or terms of the B trust.
A-B
trusts are just one form of trust available to minimize tax liability
and plane effectively to care for family left behind. Our office will
outline the pluses and minuses of the various trusts that provide
financial security and advantage under current law.
What is a charitable trust?Charitable
remainder trusts are irrevocable structures established by a donor to
provide income to a beneficiary while the public charity or private
foundation receives the remainder value when the trust terminates. So,
for example, a trust could provide income to a surviving spouse for his
or her lifetime. The donor may claim a charitable income tax deduction,
and may not have to pay an immediate capital gains tax when the
charitable remainder trust disposes of the appreciated asset and
purchases other property as it manages its portfolio of trust property.
At the end of the trust term, the charity receives whatever amount is
left in the trust.
Charitable
lead trusts make payments, either of a fixed amount or a percentage of
trust principal to charity during its term. At the end of the trust
term, the remainder can either go back to the donor or to heirs named by
the donor. The donor may sometimes claim a charitable income tax
deduction or a gift/estate tax deduction for making a lead trust gift,
depending on the type of a charitable lead trust. Generally, a
non-grantor lead trust does not generate a current income tax deduction,
but it eliminates the asset or part of its value from the donor’s
estate.
If
the trust itself qualifies as a public charity, donations to the trust
may be deductible to an individual taxpayer or corporate donor.
Charitable trusts may be set up during a donor's life or as a part of a
trust or will at death.
What is a testamentary trust?
A
testamentary trust is created in a will. The trust does not take effect
and property does not pass into the trust until death. The will
contains the trust provisions and serves as the trust document.
Making
a devise or bequest in your will to a trustee of a trust funds the
trust. The trust must be identified in your will and must exist as a
written document. Upon your death, the will distributes your assets, or
some part of your assets, into the trust to be held, managed, and
distributed by the appointed trustee according to your instructions.
A
court probate proceeding must be started to fund a testamentary trust.
Once a personal representative is appointed in a probate case, that
person has the power and duty to follow the terms of the testamentary
trust and transfer the designated assets into the trust.
Trusts
are often used to manage the property of children or grandchildren
until the child reaches a certain age. Assets may be distributed over
time or be used for specific purposes such as education. Like other
forms of trusts, testamentary trusts can manage property for someone who
has a physical or mental handicap.
For
couples in a second marriage, a testamentary trust can provide income -
and even principal in the case of need - for a surviving spouse with
the remaining assets going to the deceased's children from a previous
marriage.What is a special needs trust?
Special needs trusts are established in
order to permit a disabled or mentally incapacitated person to have the
benefits of property held for his or her use without granting control of assets
to that individual. A trustee manages the property, ensuring that the assets are not
used for food or shelter and thereby enabling the disabled person to retain Medicaid eligibility and certain
government benefits. The assets of special needs trusts established with the property of the disabled person are subject to claim by Medicaid on the person's death. The remaining assets of a special needs trust established by a third party such as a family member may pass to another beneficiary on the death of the disabled person.
What about pets and trusts? What is an honorary trust?An
honorary trust does not have a specific human or legal entity, like a
person, a corporation or charitable organization, as a beneficiary.
Honorary trusts are used to care for a person's pets or provide for the
maintenance of cemetery plots. In the case of trusts for animals, the
trust terminates after the earliest of when no living animal is covered
by the trust or 21 years. A court may reduce the amount of the property
transferred to an honorary trust if it determines that amount
substantially exceeds the amount required for the intended use.
What is a spendthrift clause? Sometimes
the person establishing the trust has concerns about a beneficiary’s
ability to manage trust assets well, or wishes to prevent trust assets
from being attached by creditors if a beneficiary is sued. A spendthrift
clause specifies that a beneficiary's interest shall not be
transferable or assignable by the beneficiary, or be subject to the
claims of the beneficiary's creditors. Creditors demands for supply of
necessities are sometimes allowed. A spendthrift clause cannot be used
to avoid claims for alimony or child support.
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