Trusts/Wills

What is a Trust?

A Trust is a living arrangement that governs how your assets are managed and distributed. You, the “Grantor”, transfer title to certain property to another party, known as the “Trustee”, who holds the property for your benefit or the benefit of others, known as “Beneficiaries”.

The terms and conditions under which the property is to be held by the Trustee are specified in the written document known as a “Trust agreement” or are established by a Will. The Trustee may be an individual or an institution such as a bank or Trust Company. Most commonly, you may serve as your own Grantor, Trustee, and Beneficiary of your own Trust.

Why create a Trust?

A Trust can privately accomplish your personal and financial objectives, including:

  • Asset Consolidation and continuity in the management of financial affairs
  • Control
  • Probate Avoidance
  • Tax Planning

Can a Trust be changed?

Trusts can be written so that they are either permanent (irrevocable) or changeable (revocable).

Irrevocable

If the purpose of the Trust is to obtain either present or future tax benefits, then the Trust should be irrevocable. Irrevocable Trusts require that the Grantor give up all rights to the property placed in the Trust and would generally be unable to modify or revoke the terms of the Trust in exchange for potential tax benefits.

Revocable

If the purpose of creating a Trust is to avoid probate and provide for the possible loss of capacity, then the Trust should be revocable or changeable. Under a revocable Trust, the Grantor retains the right to change the terms of the Trust or terminate it at any time until death.

When can a Trust be established?

A Trust can be created either when one is living (Living Trust) or automatically upon the time of death (Testamentary Trust). Living Trust A Living Trust, also known as inter-vivos, is created during a person’s lifetime for the benefit of that person or of other beneficiaries. Testamentary Trust A Testamentary Trust is established under a Will and becomes effective upon death. The Will, however, which includes the Testamentary Trust, is subject to probate.

What are some common Trusts?

Revocable Living Trust

This type of Trust is usually structured to allow individuals to control their assets while they are still capable of doing so. Additionally, a Revocable Living Trust provides instructions as to how one’s assets will be managed and distributed in the event of incapacity or death. This Trust will avoid probate and may reduce estate settlement expenses. The assets placed in the Trust will avoid probate, but will be included in the estate for purposes of estate tax formulation.

Credit Shelter Trust

The primary purpose of this type of Trust is to assure that both a husband and wife utilize their estate and gift tax credits. For example, one can exempt up to $5,000,000 of assets from estate tax in 2012.

Marital Deduction Trust

The Marital Deduction Trust is an irrevocable Trust that becomes effective at the first spouse’s death. This type of Trust is funded with property to be held for the benefit of and is usually controlled by the surviving spouse.

Qualified Terminal Interest Property Trust (QTIP)

The QTIP is a type of Marital Deduction Trust that is usually funded with the assets in excess of the applicable exclusion amount that are placed in the Credit Shelter Trust. The QTIP provides income to the surviving spouse but assures that assets pass to the beneficiaries chosen by the deceased spouse rather than those selected by the surviving spouse.

Irrevocable Life Insurance Trust (ILIT)

The proceeds of a life insurance policy owned by a Trustee of an ILIT are usually removed from an individual’s estate and therefore, from estate tax liability. The income-tax-free life insurance proceeds can be used to pay estate taxes and other settlement expenses quickly.

Charitable Remainder Trust (CRT)

The CRT provides for a future gift to a qualified charity. The individual, his/her spouse, or his/her children will receive income from the Trust for life or over a period of years, after which all remaining Trust assets will be distributed to the charitable beneficiaries. Such an arrangement may reduce the value from an individual’s taxable estate, and therefore the estate tax liability.