Trusts
What Is a Trust?
A trust has been defined as an arrangement whereby an individual intends to hold and administer property for the benefit of another. A trust is understood as a legal or fiduciary relationship between parties with respect to certain property, the being the property funded into the trust.
Trusts can be classified in various ways, including:
- •Right or power of settlor
- •Time of creation
- •Purpose of trust
- •Manner of creation –or–
- •Income tax status
The parties of a trust are settlor, trustee and beneficiary.
Parties of a Trust
Settlor
The settlor is the creator of the trust. The settlor may also be referred to as the grantor or the trust maker.
Trustee
The trustee holds legal title to the property in trust and has a fiduciary duty to perform as defined in the trust. Unless the trustee is also a beneficiary, the trustee has no personal interest in the property. The trustee is tasked with managing and investing the trust property and assets and making distributions to beneficiaries. The trustee is entitled to a commission. The trustee acts in a fiduciary role and is held to a high standard in terms of how he or she manages the estate. A trustee can be an individual, bank, corporation, or trust company.
Beneficiary
The beneficiary is the person who benefits under the trust. This person has an equitable interest in the property in the trust. Unless also the trustee, a beneficiary has no power over how the trust is managed, but they can bring an action against a trustee who is not properly managing the trust.
In some cases, depending on the type of trust created, a person may be the settlor, trustee and beneficiary. For example, in a revocable living trust, it is common for the the settlor, trustee and beneficiary to initially be the same person. However, a settlor cannot be both the trustee and the sole beneficiary. A settlor would not ordinarily be a trustee to an irrevocable trust.
Classification of Trusts
A trust may be classified by different characteristics. It may be classified by a settlors rights or powers. It may be characterized by the time of its creation, by its purpose, manner of creation or income tax status.
Revocable Trust
Typically a settlor creates a revocable trust for her own benefit and is responsible for reporting any income earned on the trust assets. Revocable means the settlor retains the right to revoke or amend the trust. However, because the settlor continues to control the assets, there is no creditor protection and the assets remain part of the settlor's estate for estate and inheritance tax purposes.
Irrevocable Trust
A settlor does not retain the right to revoke or amend an irrevocable trust. Transfer of assets to an irrevocable trust is considered permanent, and the settlor can no longer control the assets. An irrevocable trust provides creditor protection, unless the terms of the irrevocable trust provide for distributions to the settlor, and then creditors may attach only to the amount subject to distribution to settlor. Irrevocable Trusts are useful tools to shift income from settlor or remove property from settlor's estate to reduce the family's overall income and estate tax liability.
Inter Vivos Trust
A trust made during your life is an inter vivos trust.
Testamentary Trust
A trust made upon your death through your will is a testamentary trust.
Trust Property Outside of Probate Estate
In the case of a revocable or irrevocable trust, assets funded to the trust do not pass through probate at the settlor's death and are not subject to disposition under the settlor's Will. If the settlor retainer no beneficial interest, as may be the case in some irrevocable trusts, the trust assets will not be included in the settlor's estate for estate tax purposes.
Types of Trusts
There are many types of trusts. Some common trusts include:
- Special Needs Trust (SNT)
- Spendthrift
- Marital Deduction Trust
- ByPass Trust
- Qualified Terminable Interest Property Trust (QTIP)
- Qualified Domestic Trust
- Charitable Remainder Trust
- Charitable Lead Trust
- IRC 2503(c)Trust
- Pet Trust
- Irrevocable Life Insurance Trust
- Dynasty Trust
Advantages of a Trust
In addition to the income and estate tax considerations mentioned above, a trust may be used for a variety of reasons. A trust may be used to avoid probate, creditor protections, asset management, Medicaid planning, and to provide flexibility and privacy. A trust may be necessary for assets to pass to a minor, or if assets would pass to someone who does not have the skill or maturity to manage the property. A trust could condition the use of the property or control some manner of the future use, or preclude a gift outright to a beneficiary whose circumstances would be imprudent, for example, gambling, potential divorce, spendthrift, or drug addiction. Sometimes, more than one option may be available to meet to your needs. Your objective and your circumstances will be crucial in determining what estate planning tools are available to meet your needs.
Disadvantages of a Trust
Title Problems
For a trust to operate as intended, it must be funded and properly titled. Some property can easily be added to a trust, while other property is more difficult. Some banks readily permit accounts to be retitled to a trust while others do not allow or make it incredibly difficult to do so. Real Estate encumbered by a mortgage can be titled to a revocable living trust, but may trigger the due on sale clause transferring to an Irrevocable Trust without first obtaining agreement of the lender.
Trade Offs
Creditor Protection may be available with an irrevocable trust, but the protection comes at the cost of relinquishing control of the assets. A revocable trust provides control of the assets, but does not protect the assets from creditors of the grantor.
Expense
A trust is more expensive to create than a will and there is a cost to manage the trust, as a trustee is entitled to compensation. There are also costs associated with funding, such as recording fees in addition to any fees paid to fund on your behalf.
Updates Required
Whether your Life and Legacy plan includes a will or a trust based solution, changes in circumstances, such as births, deaths, divorces, should be addressed. Amendments to a trust are a viable option, as is a restatement.
Should I use a Trust in My Estate Plan?
Whether or not a trust is a tool that can be used to meet your Life and Legacy planning objectives will require review and analysis of information you must provide to us. If you would like to learn more, reach out to schedule a consultation.
Hartmann Law is here to Help You
For more than 20 years, Angela Rich Hartmann has successfully guided her clients through personal legal matters, including the difficult and often emotional process of estate planning. Taking great pride in offering personalized service, Angela Hartmann dedicates her time to learn and understand each Client's needs, not only as it relates to the legal matter, but as it relates to them as a person. Perhaps even more so than other areas of law, understanding a Client's objectives, goals, and values are essential within within Estate Law. Properly planned, their Legacy is ensured. Making this connection, Angela Hartmann has been able to successfully develop long lasting professional relationships with many of her Clients. With gratitude, each new Client who has been referred by an existing or former Client, is seen as the highest compliment of her service, and a sign that personal attention is an unequaled service that remains sought in the automated, impersonal digital age. Contact Hartmann Law today.
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