by Jeffrey W. Jones, Esq.

Trust Basics

Trusts are used when you want to control the way in which your property is used to benefit your loved ones or other intended recipients. They are used for many purposes, such as:

  • to obtain certain tax benefits
  • to avoid probate and publicity for your estate
  • to avoid probating your estate in any state, other than your home state, where you own real estate
  • to provide for young or disabled beneficiaries
  • to obtain the benefit of professional management for less experienced beneficiaries
  • to preserve family assets by protecting them from a beneficiary’s creditors or divorcing spouse

Trust Types

Common examples are: Revocable Living Trusts, Testamentary Trusts (contained in a will), Marital Deduction Trusts (including QTIP Trusts), Bypass Trusts, Irrevocable Life Insurance Trusts, Qualified Personal Residence Trusts, Charitable Remainder Trusts, Charitable Lead Trusts, Special Needs Trusts, Asset Protection Trusts and Real Estate Trusts. A single trust instrument may contain two or more of the different types.

A trust can be very complex, but at its core it is simply a contract involving three parties: the Settlor (also sometimes called the Grantor, Trustmaker, or Creator – the person who creates the trust and conveys assets to it), the Trustee (who administers the trust according to the Settlor’s written directions), and the Beneficiary (one or more persons who receive income or principal of the trust, or use of trust assets, also according to the written directions of the Settlor). In many revocable living trusts, all three parties are the same person initially, then as the Settlor ages, another trustee may take over, and, eventually, perhaps when the Settlor dies, other beneficiaries come into the picture.

A trust can be created by a few paragraphs in a will (an example of a Testamentary Trust), or by a stand-alone document that may be only a few pages long, or might run for 20 or more pages. Different kinds of trusts require more (or less) complicated instructions for the Trustee.

Most of the estate plans we draft at JONES, KURILOFF & SARGENT Law involve the use of trusts. In many cases we advise using a living trust (also called an inter vivos trust) as the centerpiece of the estate plan. These are trusts which can be revocable or irrevocable, which are executed and funded (transfer of assets to the trust) during your life to serve a variety of purposes.

Certain kinds of irrevocable trusts can generate favorable income and estate tax consequences. For example the IRREVOCABLE LIFE INSURANCE TRUST.

Revocable Living Trusts

Revocable trusts, by far the most commonly used type, can save taxes for a married couple, but are also used as an asset management device and can reduce or eliminate the publicity, delay, and expense of probate administration. (Contrary to popular belief, it is often impossible to avoid probate entirely, unless you have virtually no assets in your name at death. By using a properly funded living trust, however, probate can be reduced to an inconsequential detail.)

You can be the trustee or co-trustee of your own revocable living trust, continue to deal with all of your property as you always have, and report trust income on your personal income tax return. You do not need to get a separate tax ID number for your revocable trust, as long as you are a beneficiary and one of the trustees. If you become incapacitated, or after your death, the trust becomes irrevocable and your designated successor trustee takes over. At that point a tax ID number should be obtained, and the trustee will have to file annual income tax returns for your trust.

Irrevocable Trusts

You must always give up some control of your property in order to achieve the benefits that any irrevocable trust is designed to create. With proper drafting and careful attention to tax laws, however, a remarkable degree of freedom can be achieved, especially by employing a professional trustee with a cooperative attitude. It appears that you can even be a contingent beneficiary of your own trust and insulate the assets you transfer to it from future creditors if you establish the trust under the laws of Alaska, Delaware or one of the other states that allows Domestic Asset Protection Trusts (or in some offshore jurisdiction with favorable laws). ASSET PROTECTION Irrevocable trusts, especially those established in another state or country, are usually much more complicated and expensive to set up and maintain than revocable trusts. A cost-benefit analysis is usually in order if you are considering an irrevocable trust. (You should consider the annual tax return preparation and trustee fees, in addition to the start-up costs.)

Funding Your Trust

If you establish a living trust of either type, you will ordinarily want to “fund” it immediately, by transferring property to it. In this case your estate planning documentation may include assignments of personal property, deeds, stock powers, change of beneficiary forms, or other such documents of transfer.

 

The information presented on this website is general in nature and not intended to be legal advice. No attorney-client relationship will exist with Jones, Kuriloff & Sargent, LLC unless we agree in writing after a personal consultation. Please contact us for a consultation on your particular situation.