What is a trust?

A Trust is a well recognized type of legal entity which is used to hold legal title to property for the benefit of one or more persons. The person creating the Trust is often known as the Trust Creator or Grantor. The person or institution holding legal title to the property is called the Trustee. The persons who are intended to benefit from the Trust are known as Beneficiaries.

What is a trust estate?

The property that is transferred to a Trust becomes the Trust Estate. A Trust Estate consists of all of the property, rights and obligations that are transferred to the Trust. The Trust Estate is managed in accordance with the terms and conditions of the document creating the Trust.

Who are the parties to a trust?

There are typically three main parties to a Trust:

(1) The Trust Creator, sometimes called the Grantor or Settler, is the person who started out as owner of the property that is to be transferred to and held by the Trust.

(2) The Trustee is the person or financial institution (such as a bank or Trust company) that holds the legal title to the Trust estate. There may be one or more Trustees. If a Trustee is unwilling or unable to serve, then a successor Trustee steps in to hold and manage the Trust estate. The Trustee is obligated to act in accordance with the terms of the Trust for the benefit of the Trust beneficiaries.

(3) The Beneficiaries are the persons who the Trust Creator intended to benefit from the Trust estate. The rights of the beneficiaries depend on the terms of the Trust. Beneficiaries are said to have the “equitable title” to the property held in the Trust.

Can I create a trust, serve as the trustee and be the trust beneficiary?

Yes, in most states. Historically courts concluded that there was no need for a Trust when the Trustee was also the beneficiary. (The legal and equitable titles were said to have “merged”.) However, now, in most states, if it is done right, a Trust Creator may establish a revocable Trust, serve as the initial Trustee and be able to obtain immediate benefits as a Beneficiary from Trust property.

What is a ‘trust agreement’ or a ‘declaration of trust’?

These two terms refer to a written document that sets forth the terms and conditions of the Trust. The differences between them are largely matters of style and local practice.

Typical provisions in a Trust agreement or declaration of Trust for an individual or married couple include the following:

(1) a statement of the purpose of the Trust

(2) the names of the Trust creator’s family members

(3) whether the Trust creator, or anyone else, may amend or revoke the Trust

(4) who will serve as the initial Trustee(s), and who would serve, and in what order, if the initial Trustee becomes unable or unwilling to serve, in the event of illness, death or for any other reason

(5) what powers the Trustee should have, in terms of investment and management, and what discretion the Trustee is to have in terms of releasing money to beneficiaries, such as for education
v (6) who the beneficiaries of the Trust are, or how to determine them; the Trust creator and his or her spouse are typically beneficiaries in a “living” Trust.

(7) who is to receive distribution of the Trust estate upon the death of the grantor, and

(8) when the beneficiaries would be entitled to receive the distributions, often at age 21, or half at age 21 and half at age 30.

What are some of the different forms of trusts?

Trusts come in a variety of forms and can be established in many different situations. Some common forms of Trusts include:

(1) Asset Protection Trust – A type of Trust that is designed to protect a person’s assets from claims of future creditors, frequently established in foreign countries.

(2) Charitable Trust – A Trust – and there are many different types of charitable Trusts – established to benefit a particular charity or the public. Typically charitable Trusts are established as part of an estate plan to lower or avoid imposition of Federal (and some states’) estate and gift taxes.

(3) Constructive Trust – An implied Trust establish by operation of law. While a person may take legal title to property, equitable considerations require that the equitable title of such property remain with others. Typically fraud is a requirement for the establishment of a constructive Trust, the person who took legal title to the property did so as a result of a fraud brought upon the prior legal title holder.

(4) Express Trusts – are those specifically created by the grantor under a Trust agreement or declaration of Trust.

(5) Implied Trusts – arise from particular facts and circumstances in which courts determine that although there was not any formal declaration of a Trust, there was an intention on the part of the property owner that the property be used for a particular purpose or go to a particular person. For example, if a neighbor asks you to take care of her car for her when she is on vacation, and never returns, there was an implied Trust, as she was not making you a gift of the car.

(6) Inter Vivos Trust – A Trust that is created during the lifetime of the grantor. A common type is a revocable “living” Trust in which the grantor transfers title to property to a Trust, serves as the initial Trustee, and has the ability to remove the property from the Trust during his/her lifetime.

(7) Irrevocable Trust – A Trust that cannot be altered, changed, modified or revoked after its creation (absent extreme extenuating circumstances). Once a grantor transfers property to an irrevocable Trust, the grantor can no longer take the property back from the Trust.

(8) “Living” Trust – A Trust created during the lifetime of a grantor which can be altered, changed, modified or revoked. Typically the grantor is the initial Trustee as well as the initial beneficiary of the Trust, with his/her spouse and children as the ultimate beneficiaries of the Trust.

(9) Resulting Trust – A Trust that arises from, or is created by operation of law, when the legal title to property is transferred, but the beneficial interest is to be enjoyed by someone other than the person who got the legal title.

(10) Special Needs Trust – A Trust that is established for a person who receives government benefits so as not to disqualify the beneficiary from such government benefits. Ordinarily when a person is receiving government benefits, an inheritance or receipt of a gift could reduce or eliminate the person’s eligibility for such benefits. By establishing a Trust which provides for luxuries or other benefits which otherwise could not be obtained by the beneficiary, the beneficiary can obtain the benefits from the Trust without defeating his/her eligibility for government benefits. Often a Special Needs Trust includes a trigger which terminates the Trust in the event that it could be used to make the beneficiary ineligible for government benefits.

(11) Spendthrift Trust – A Trust that is established for a beneficiary which does not allow the beneficiary to sell or pledge away his or her interests in the Trust. A spendthrift Trust is beyond the reach of the beneficiaries creditors, until such time as the Trust property is distributed out of the Trust and placed in the hands of the beneficiary.

(12) Tax By-Pass Trust – A type of Trust that is created to allow one spouse to leave money to the other, while limiting the amount of Federal Estate tax bite that would be payable on the death of the second spouse.

(13) Testamentary Trust – A Trust that is included under the terms and conditions established in a Will. Such Trusts take effect after the death of the person making the Will.

(14) Totten Trust – A Trust that is created during the lifetime of the grantor by depositing money into an account at a financial institution in his or her name as the Trustee for another. This is a type of revocable Trust in which the gift is not completed until the grantor’s death, or an unequivocal act reflecting the gift during the grantor’s lifetime.

Many Trusts themselves establish “sub-Trusts”. For example, a revocable “living” Trust might establish spendthrift Trust and a tax by-pass Trusts upon the death of the first. Trusts can be structured to handle a variety of situations but careful drafting is essential to make the plan work.

What is a Bypass Trust?

A Bypass Trust, sometimes called a Life Estate or A-B Trust, is a way for couples of combined estates of more than $1 million (2002 and 2003) to be exempt from estate tax if one or the other dies. This amount, which is exempt from Federal Estate Tax, increases to 1.5 million in 2004 and 2005, 2 million in 2006 through 2008; 3.5 million in 2009 and then in 2010 there is no federal estate tax. However in 2011 the Federal Estate Tax is returned to the 2002 level.

A Bypass Trust is designed to let the $1 million tax exemption be used by each spouse. Through a Bypass Trust, the surviving spouse can receive any portion of the decedent`s estate free of estate tax. The surviving spouse never legally owns the property within the Trust because it`s legally owned by the Trust. The spouse can use the assets and property within the estate with certain restrictions. However, when the surviving spouse dies, if the estate is worth more than $1 million, a significant amount of estate taxes will be due before the beneficiaries can receive their inheritance.

What is the QTIP trust?

QTIP trust stands for the qualified terminable interest property trust. It allows certain property to qualify for an estate and gift tax marital deduction even though it ordinarily would not qualify for such tax deductions. One type of QTIP property that can qualify for a marital tax deduction are trusts which provides income to a surviving spouse for life and after the spouse dies the remainder goes to the children. Please contact an attorney if you would like more information about this type of trust.

What is a Living Trust?

A Living Trust is an effective way to provide lifetime and after-death property management and estate planning. When you set up a Living Trust, you are the Grantor; anyone you name within the Trust who will benefit from the assets in the Trust is a beneficiary. In addition to being the Grantor, you can also serve as your own Trustee (Original Trustee). As the Original Trustee, you can transfer legal ownership of your property to the Trust. While this can save your estate from estate taxes when you die, it does not alleviate your income tax obligations.

Within a Living Trust you must provide the name of a Successor Trustee who will take over the management of the Trust if you die or become incapacitated. You don`t have to go through the court to appoint a successor trustee. After your death, your Successor Trustee either terminates the Trust and distributes the assets to the beneficiaries you named in the Trust, or he/she continues to maintain the Trust on behalf of your beneficiaries, depending on the terms of the Trust.

What is a Spendthrift Trust?

A Spendthrift Trust helps to protect the beneficiary from creditors. Most of the assets in the Trust will pretty much be safe from banks or creditors. However, creditors can still collect any money paid directly to the beneficiary from the Trust. If you think that your beneficiary could have problems with creditors, you can give the Trustee broad control over the Trust. The Trustee may be instructed by the Trust to withhold income and/or principal from the beneficiary. For maximum effectiveness, a Spendthrift Trust should be irrevocable. It must also give the Trustee full discretion over the assets of the Trust, so the Trustee will have full power in deciding when and how much money should be given to your beneficiary.

What is a Totten Trust?

Setting up a Totten Trust is as simple as going to a bank and opening a Trust account by yourself. A Totten Trust is best for amounts of about $20,000 or less. Larger amounts could present problems in payment of estate taxes at your death, since the assets in these accounts are added to your taxable estate. A Totten Trust can be paid out quickly after your death with a minimum of formalities. Because the money transfers directly, you don`t need to choose a third-party Trustee. As with any other Trust, you keep your assets out of probate. You can revoke a Totten Trust at any time during your life, and the beneficiary can`t withdraw the money from the Trust account until you die.

What is a Testamentary Trust?

Unlike a Living Trust (made while you are alive), a Testamentary Trust is established through your Will at your death to handle your minor children`s estate (financial affairs), should you die and there is no other living parent. This alleviates the necessity of having to set up a guardianship of the estate, with all of the concurrent court filings, accountings and supervision.

The Executor is given full discretion to decide if the Trust is beneficial to the children, and the trust should be established. If you currently have minor children, or are considering having children, including this provision gives your Executor the greatest flexibility in handling your children`s estate if neither parent is alive while the children are still minors.

Normally, the person or one of the people named as guardian of your minor children will also be named the Trustee of the Trust. However, in some situations it may be advantageous to have different people fulfill these roles. For example, the best person for the emotional and moral upbringing of your child may be your Aunt Mary, but Cousin Joe could be a better financial manager. So, it may be in your children`s best interest for you to choose Aunt Mary to be the guardian and Cousin Joe to be the Trustee of the Trust.

What is an Abstract of Trust?

A condensed version of a Living Trust document, which leaves out details of what is in the Trust and the identity of the beneficiaries. An Abstract of Trust is normally used to prove to a financial organization or other institution that you have established a valid Living Trust, without revealing specifics that you want to keep private. In some states, this document is called a Certification of Trust.

What is an Accumulation Trust?

A trust in which the income is retained and not paid out to beneficiaries until certain conditions are met. For example, if you create a trust for your child`s benefit that stipulates that he/she will not have access to the assets until he/she turns 21 or graduates from college.

What is the difference between a Revocable Trust and an Irrevocable Trust?

A Revocable Trust is where the Grantor can change the terms of the Trust or even revoke the Trust altogether and take back all of the assets in the Trust. An Irrevocable Trust is where the terms of the Trust cannot be changed (i.e., the beneficiary cannot be changed), and that whatever assets are placed in that Trust cannot be withdrawn by the Grantor.

How is a trust helpful in estate planning?

A Trust, if properly drawn and “funded”, can be extremely helpful in many situations such as:

(1) To avoid a conservatorship. If property is held in a Trust, a successor Trustee can step in and take over management, without the delay and expense of going to court to appoint a “conservator” to manage the property, if the Trust Creator becomes disabled.

(2) To avoid probate. A properly drawn Trust is a separate entity that does not die when the creator dies. The successor Trustee can take over management of the Trust estate and pay bills and taxes, and promptly distribute the Trust assets to the beneficiaries, without court supervision, if the Trust agreement gives the Trustee that power.

(3) Maintaining privacy. Trusts, unlike Wills, are generally private documents. Your neighbors and the public would be able to see and how much you had and who your beneficiaries were under a Will, but usually not with a Trust.

(4) Help keep certain property separate from other property. For example, if you want your daughter to get your vacation home, and your son to get your house in the suburbs, if you create a separate Trust for each property there would be no question of commingling or who gets what.

In many estate plans, the Trust is the central tool that is used to control and manage property. A Trust continues despite the incapacity or death of the grantor. It determines how a Trustee is to act with respect to the Trust estate. It determines how property is to be distributed after the death of the grantor. A Trust is thus one of the major estate planning tools used for a grantor’s property so that court interference in the event of incapacity or death can be dramatically reduced (if not completely eliminated).

Who should have a trust?

You should discuss the advantages of a Trust over a Will (even with a Will creating a “Testamentary Trust”) with an attorney if:

(1) you are the parent of minor children, or

(2) privacy is important to you, your business or your family, or

(3) you own real property, particularly any property outside of your home state, or

(4) your estate has a gross value in excess of $1,000,000 (this amount increases slowly to $3.5 million in 2009; the tax is completely repealed in 2010, but reinstated in 2011), or

(5) you wish to avoid conservatorship or probate.

A Trust in NOT necessary for everyone, and some lawyers prefer to have matters go through probate, but it certainly makes sense to discuss it.

How much do trusts cost?

That varies considerably, and is sort of like asking “how much does a house cost”? The fees are typically based

(1) on the complexity of the estate,

(2) the nature of the property involved, and to a lesser extent, its value,

(3) the amount and nature of the tax planning that is necessary,

(4) the amount of time the client will be spending with the lawyer, and the extent of “hand-holding”,

(5) what the client will do on his or her own, and what the lawyer will do,

(6) the other documents involved (powers of attorney, deeds, health care powers), etc.

Generally the most crucial part of a Trust (or a Will) is the planning that goes into its preparation. Words are pretty commonplace, and it is advising you what the alternatives are, how to solve foreseeable problems, and only then “drafting the documents” — essentially arranging the words to say what you would want done — and taking the risk of an error, that lawyers charge for.

While it generally costs more to prepare a Trust than a Will, a Trust often does a lot more than a Will.
One bit of advice. DO NOT USE PRE-PRINTED FORMS. Even the best pre-printed form is likely to have provisions in it that are harmful. Further, unlike lawyers, stationery stores and computer software manufacturers do not assume any responsibility for errors that are in the programs, language or that result from faulty execution.

When should I create a trust?

The only time that you can prepare and implement a Trust and an estate plan is while you are alive and have legal (“mental”) capacity to enter into a contract. If you should become unable to manage your own affairs or suffer from some other disability which affects your legal capacity, your Trust may be effectively challenged by those who assert that you lacked capacity at the time the documents were created, that you were subjected to fraud, coercion or undue influence during the creation and implementation of your Trust.

The best time to discuss the need for a Trust and its role as part of a comprehensive estate plan with an attorney is now, while you have the capacity to do so

How do I select the trustees and successor trustees?

A Trustee is a person or institution selected to follow the instructions provided by the declaration of Trust. A Trustee has a very high “fiduciary duty” to act with the utmost good faith in dealing with the Trust estate.

Many grantors and their respective spouses act as the initial Trustees of a revocable living Trust. In this way they remain in control until they are incapacitated or die. Then pre-selected successor Trustees are appointed in accordance with the terms of the declaration of Trust. Usually a spouse, family member or Trusted friend are selected as successor Trustees.

Trustees should be knowledgeable about financial matters, be Trustworthy, know how to manage and invest the Trust estate, care about the beneficiaries of the Trust, and have the financial capacity to reimburse the Trust in the event that they make serious mistakes. If a bank or Trust company is selected to serve as a Trustee of a Trust, it will usually charge a fee for this service, which is then paid from the Trust estate. An attorney can give you specific advice as to who you might name as a Trustee, in light of your own personal and family situation.

What is conservatorship?

If you suffer from an incurable disease or are involved in a debilitating accident and are unable to manage your own affairs, state law might require someone to go to court to have a conservator appointed by the court. The conservator is given the authority to make financial decisions and handle your financial affairs, under court supervision, when you lack the capacity to manage them on your own.

The conservator has to make periodic reports to the court and petition the court for additional authority under certain circumstances. Typically, the conservator may be paid for services rendered on your behalf and there will be attorney fees as well. In addition, the court will often require your conservator to purchase a “surety bond” which is a type of insurance policy, to protect the conservatorship estate. The costs and expenses of a conservatorship are paid by your estate.

How can a trust prevent a conservatorship proceeding?

A Trust is used to hold the property, and the Trustees manage the Trust estate. In the event of your incapacity your pre-appointed Successor Trustee(s) will manage the Trust estate in accordance with the instructions that you have provided. Thus, a properly prepared and funded Trust can enable you to avoid a conservatorship proceeding over your estate. Compared with the cost of a conservatorship proceeding, a Trust can be very attractive.

How can a trust lower the Federal Transfer Tax liability?

Everyone gets a “credit” against Federal Estate Taxes of $550,800 on an exemption amount of $1.5 million in 2004 and 2005 (or $2 million in 2006, 2007 and 2008). (Unless previously used up, in whole or in part, as a result of gifts of more than $11,000 to any one person in any year, or $12,000 to any person in any year starting in 2006).) Individuals and married couples with a total estate value less than the current exemption level don’t have to worry about Federal Estate or Gift Tax (the exemption amount slowly increases in steps to $3.5 in the year 2009 but then drops back to $1 million when the estate tax is reinstated in 2011).

For those who are married, there is an unlimited marital deduction. All estate taxes can be avoided upon the death of the first spouse to die. However, the surviving spouse would have to remarry and give his/her entire estate to the new spouse in order to get another unlimited marital deduction. Most people would rather their children or other relatives benefit from the estate than a new spouse and his/her family.

An estate plan can take advantage of certain tax avoidance techniques for those who have accumulated some wealth; this gets more of your property to your intended beneficiaries and less to the federal government. By using a Trust, you can establish a tax by-pass Trust at your death to hold property for your children but enable it to provide for your surviving spouse during his/her lifetime. This enables you to place up to $1,000,000 (or the current exemption amount) in a Trust for the benefit of your surviving spouse and children (which will not be subject to estate tax upon the death of your surviving spouse). Coupled with your surviving spouse’s estate and gift tax credit, this enables your spouse and you to send up to $2,000,000 (or the applicable exemption level in that calendar year) to your children free from Federal Estate and Gift Tax. (Some states also have state estate or inheritance taxes.)

What protection is available by a revocable ‘living’ trust?

A revocable living trusts is a vehicle that is very helpful in avoiding probate. During your lifetime, you can transfer ownership of your assets to the revocable trust so that it is owned by the trust at the time of your death, and thus not subject to probate.

A revocable trust is not a very good asset protection technique – assets that you transfer to the trust will remain available to your creditors. However, it does make it more difficult for creditors to access these assets; before doing so, the creditor must petition a court for a charging order to enable the creditor to get to the assets held in the trust.

In addition, in most instances a revocable trust becomes irrevocable, usually upon the death of the grantor. Once it is irrevocable, a typical “anti-alienation clause” protects the assets held in the trust form being used as collateral by the trust beneficiaries. While the assets are held in the trust, the beneficiaries do not have control over the property, and any distributions are subject to the trustee’s discretion. Creditors cannot force a trustee to make a distribution to the trust beneficiaries; thus the assets held in a trust can remain outside the reach of the beneficiaries’ creditors (until distributed into the hands of the beneficiary).