One of the most valuable and flexible estate planning tools is a trust. Trusts evolved and became popular during the thirteenth century in England. In the wars of that period, wealthy people often wound up on the wrong side and lost all of their property.
To avoid this result, assets were transferred to a neutral person to “use” of one’s family. These “uses” became the predecessor of modern trusts.
What is a Trust?
A trust is not too difficult to understand. It is a legal relationship in which one person transfers property to a “trustee” to benefit a third person. The creator of the trust is the “grantor.” The person having legal title to the trust property is the “trustee” and has the responsibility of following the terms of the trust. The person for whose benefit the trust is created is the “beneficiary.”
Note: One person can be a grantor, trustee, and beneficiary all at the same time. Why a Trust? Individuals establish trusts for a variety of reasons. Here are some of those reasons:
Management – Assets can be transferred to a trustee (corporation, individual, or both) skilled in managing and investing the trust property.
Protection – Certain trusts help insulate one’s assets from the claims of creditors. Others are established to protect against the grantor’s (or a beneficiary’s) incapacity, improvidence, or incompetence.
Tax Savings: Trusts are frequently created to allow the grantor and his or her family to save current income taxes or future transfer taxes.
Example When Dan dies, he can shelter up to $11.58 million (in 2020) in a trust. At the death of his surviving spouse, the assets in the trust are not taxed for federal estate tax purposes. If the surviving spouse also has an estate of $11.58 million, the use of a trust can shelter up to $23.16 million from federal estate tax. While there is no limit on the assets which Dan can pass to his spouse on death without a trust, only $11.58 million (in 2020) might be passed tax-free on the surviving spouse’s death, assuming no portability. Thus, $11.58 million more could be transferred to the estate tax-free using a trust.
Timed Disposition: People often want to put restrictions on the disposition of their assets. Often, the best way to accomplish this is by use of a trust. For example, if children are to receive assets at age 30 instead of age 18, a trust is an alternative to an outright transfer of the property.
Example
If Dan and Daphne die without an estate plan when their children are young, their assets will go to a court-appointed guardian to hold for the children. When each child attains age 18, they receive their share of the assets outright. If Dan and Daphne set up a trust, the assets can be used for the children’s benefit until each child is old enough to manage their own assets.
Flexibility – Trust provisions can be established to complement almost any situation. Twenty-twenty foresight via the trustee can be invaluable, especially in today’s complex society. For example, two beneficiaries may be equal in every way today. Still, ten years from today, one beneficiary may have a greater need for trust income than the other beneficiary.
Privacy – Unlike a will, which becomes part of the public record after the probate process, the details of an inter vivos (“living”) trust can be kept confidential. In some cases, this confidentiality factor can be very important.
Probate Avoidance: Most people want to avoid probate because of the delays, the hassles, and the costs. Trusts, particularly living trusts, avoid probate. While there are some costs at death with a living trust, it can avoid 90- 95% probate costs.
Long-Term Care & Conservatorship Avoidance
Trusts can be used for long-term care. Physically or mentally handicapped relatives need to be cared for financially.
Assets left outright to these people will often require a con-4-3 conservatorship to manage the assets. However, a trust can leave assets with a trustee to be used for such a person. Example Dan dies and leaves his assets in trust for his son, Ralph.
The trustee must pay the income to Ralph for life and, in an emergency, invade the trust principal for Ralph’s benefit. If Ralph marries and divorces, his ex-wife does not get the assets. If he goes bankrupt, his creditors cannot get the trust assets. As a result, Ralph can’t give the trust assets away during his lifetime.
Types of Trusts
The basic types of trusts break down into “living” trusts (trusts created during the lifetime of the grantor) and “testamentary” trusts (trusts created under the terms of one’s will). Living trusts can be either revocable (i.e., the grantor can amend or destroy the trust at any time) or irrevocable (unamendable or fixed).
During one’s lifetime, a testamentary trust is also “revocable” in the sense that one can always change its terms through the formal procedure of changing the will of which it is a part. Living and testamentary trusts become irrevocable at the death of the grantor. Common Elements Every trust has four common elements: (1) A grantor or donor (creator of the trust.
