Ultimate Guide to Trusts

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 What Is a Trust?

Trusts are estate-planning tools that establish relationships under the direction of an individual called the trustor or settlor. A trust directs a person or people, called the trustee(s), to hold the trustor’s property for the benefit of others, called the beneficiaries.

Trusts can be created for various reasons, such as a financial benefit for the creator, financial support for surviving spouses, or charitable purposes.

What Are the Different Kinds of Trusts?

There are several different types of trusts. However, all of these fall under two categories: living and testamentary. Living trusts begin during the life of the trustor.

Testamentary trusts transfer property into the trust only after the trustor has died. In a testamentary trust, the trust property must go through probate before it can be created.

  • Revocable Trust: A revocable trust is a trust created while the trustor is still living. The trust becomes irrevocable upon the death of the trustor. The trustor can revoke or modify a revocable trust without requiring anyone else’s consent.
  • Irrevocable Trust: Similar to a revocable trust, an irrevocable trust can be created while the trustor is still alive. However, irrevocable trusts cannot be revoked or changed by the trustor after they are created without the beneficiary’s or beneficiaries’ consent.
  • Credit Shelter Trust: A credit shelter trust is created for the benefits it provides the trustor regarding state and federal tax exemptions. The benefits are only available to those with fortunes exceeding the multi-million dollar threshold.
    • The trust allows a married investor to avoid estate taxes when passing assets on to their heirs. The assets specified in the trust agreement are transferred to the beneficiaries upon the investor’s death. Additionally, the trustor’s spouse retains rights to the trust assets and income for the remainder of their lives under this trust.
  • Generation-Skipping Trust: A generation-skipping trust is a type of trust agreement wherein the trust assets are passed down to the trustor’s grandchildren, not children. If the assets were transferred to the trustor’s children, they would be subject to estate taxes.
  • Qualified Personal Residence Trust: A qualified personal residence trust (QPRT) is a trust wherein the advantages lie in the significant savings that may be had in property transfer costs. The QPRT is created by transferring a personal residence to an irrevocable trust where the trustor retains the right to live in the residence for a fixed term of years.
  • Irrevocable Life Insurance Trust: Under an irrevocable life insurance trust, the trustee invests proceeds from the trustor’s life insurance policy upon their death and administers the trust for one or more beneficiaries.
  • Qualified Terminable Interest Property Trust: A qualified terminable interest property (QTIP) trust is created to permit a trustor to give a life estate in property to their spouse without the transfer being subject to the federal gift tax. The spouse receiving the property has an income interest in the trust but not a power of appointment.
  • Land Trust: A land trust is a private agreement between two parties. The trustee holds title to the property in trust for the beneficiary.
  • Charitable Trust: A charitable trust is set up for a charitable purpose. A charitable contribution deduction is allowed under a specific section of the Internal Revenue Code for these trusts, even though they are not tax-exempt. For a charitable trust to be classified as a public charity, it must meet one of the exclusions.
  • Secret Trust: A secret trust is a trust that arises when a property is left to a person through a will with the understanding that they will act as the trustee of that property for the benefit of beneficiaries who are not named.
    • In a fully secret trust, the will does not mention the existence of the trust, and all that is stated is that the trustee is receiving the property. The will specifies that the trustee is to hold the property in trust but does not specify the terms of the trust or the beneficiaries.
  • Special Needs Trust: A special needs trust is designed for beneficiaries who are disabled, either physically or mentally. The trust allows the beneficiary to enjoy the property or funds from the trust without affecting their ability to receive government benefits. The beneficiary can also create this type of trust if, due to their disability, they cannot manage their own finances.
  • Spendthrift Trust: A spendthrift trust gives an independent trustee full authority to decide how the trust funds may be spent for the benefit of a financially irresponsible beneficiary or in great debt. The beneficiary’s creditors cannot reach the funds in the trust, and the beneficiary does not have control over the funds.
  • Totten Trust: A Totten trust is created when the trustor places money in a bank account or security with instructions that the proceeds in the account be distributed to the named beneficiary upon their death. The typical verbiage of a Totten trust includes the language that the account is held “in trust for the beneficiary.”
  • Discretionary Trust: A discretionary trust is a trust that provides for beneficiaries to receive specific, stated funds from the trust with specific instructions outlined in the trust. A discretionary trust is created for the benefit of a beneficiary who cannot manage their finances responsibly, and the trustee wants to protect those assets while still providing for them.
  • Custodial Trust: A custodial trust is a bank account, trust fund, or brokerage account set up for a beneficiary but held in trust by a responsible person. A custodian is not a trustee. A custodian owes the same fiduciary duty to the beneficiary to handle the assets in the beneficiary’s best interest.
  • Crummey Trust: A Crummey trust allows a person to make lifetime gifts to an individual free from gift or estate taxes as long as the value of the gift is equal to or less than the permitted value of $14,000 per individual and $28,000 per married couple, while also protecting the money in a trust. A trust does not give the beneficiary immediate control over the “gift” but saves it for the beneficiary’s future benefit.
  • Bypass Trust: A bypass trust is an irrevocable trust. It is created when a settlor deposits assets into the trust and pays trust income and principal to the surviving spouse for the duration of their life. Under the unlimited Marital Deduction, the transfer of assets to the bypass trust is tax-free for the spouse. It is only relevant to use a bypass trust if the value of the estate exceeds the state’s current estate tax exemption.
  • Asset Protection Trust: An asset protection trust is a trust that provides for funds to be held on a discretionary basis. Setting up these trusts to avoid the negative effects of estate taxes, divorce proceedings, and bankruptcy on the beneficiaries is possible. Creditors cannot reach the assets in this type of trust.

Requirements for a Valid Trust

The process of creating a trust is relatively simple.

To be valid, the trust must meet the following requirements:

  • Intent: The trustor must have intended to create the trust when it was created.
  • Trustee: There must be a person in charge of managing the trust for the benefit of the beneficiary and transferring the assets to the beneficiary. The court may appoint someone if no specific person is designated.
  • Beneficiary: The trust must state who will receive the trust’s assets.
  • Purpose: There must be a specific purpose for the trust that does not involve furthering illegal activity.
  • Assets: The trust must have assets, such as money or property. A trust cannot exist if there are no assets to put into it.

What Can Be Placed in a Trust?

An important element of a trust is that it contains assets. The title should be transferred to the trust when an asset has a title, such as real estate or stocks and bonds.

The title to personal property, such as jewelry, clothing, and furniture, does not exist. It is also possible to transfer these items to the trust by transferring the property rights to the trustee to serve as assets for the trust’s beneficiaries.

Items such as life insurance policies, retirement accounts, pension plans, and health savings accounts cannot be transferred to the trust since their distribution is determined by the beneficiary named in the policy. To place assets derived from these items in trust, the named beneficiary must be the trustee.

Who Is Considered a Valid Beneficiary?

Anyone can be a trust beneficiary if they are properly named in the trust document.

Beneficiaries are usually spouses, children, grandchildren, and friends. Pets, co-workers, strangers, or employees may also be beneficiaries, depending on the trust. Trust beneficiaries must be definite and certain. When the trust is created, it must be ascertainable. A beneficiary’s description must be detailed enough to allow the court to determine their identity.

What Is a Successor Trustee?

Settlors usually name themselves as trustees of living trusts during their lifetimes. A successor trustee should be named if the settlor becomes incapacitated or dies. The successor trustee has the same fiduciary duty to act in the beneficiaries’ best interests as the original trustee.

What Is a Pour-Over Will?

Many people fail to transfer some property into their trust before they die. Pour-over wills are used in conjunction with trusts to correct this particular problem. In a pour-over will, the deceased’s property is transferred into the trust the deceased established at their death.

Thus, if the deceased passes away before all their property is transferred into the trust, a pour-over will ensures all property is transferred. In a pour-over will, the property outside of the trust does not have to go through probate, which the trustor hoped to avoid when they created their trust.

Getting Help with a Trust — Contact a Trust Lawyer

Whether you have a small or large estate, it is important to contact a trust lawyer when planning how you want your estate to be distributed. To protect your estate, you need to consider the potential tax implications and legal formalities relating to the validity of your will and trust. Your lawyer can explain how to protect your assets to benefit your beneficiaries and family.

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