Trusts

Trusts serve several useful long range financial planning purposes. 

1. They provide a means to accumulate assets so that in the event of your disability or death, the trustee can continue to manage your portfolio on your behalf following instructions in the trust agreement.
   
   
2. At the time of death, assets in the trust are not subject to probate taxes or control by the executor, and the terms of the trust are not required to be disclosed to the court unless the trust is part of one’s will.
   
   
3. Assets can be irrevocably transferred to a trustee for charitable purposes, to provide long term benefits for a disabled child, or to avoid or minimize the impact of federal and state estate taxes.

Parties to a Trust

A trust is an arrangement in which the person creating it, the ”grantor” or “settlor,” conveys property to a “trustee” and directs the trustee to manage and invest the assets for the benefit of the “beneficiaries.”  In a revocable trust, the trustee, grantor and the beneficiary may be the same person.  If the trustee is an individual, the trust should name a successor trustee or set out a procedure for replacing the trustee in the event of his or her death or disability.

Revocable Trusts

A trust is revocable if the grantor that created it reserves the right to terminate, amend or revoke the trust at any time. 

Revocable trusts are useful for holding assets during lifetime to be managed for the benefit of a surviving spouse after the death of the first spouse.  After the death of the second spouse, the assets can be distributed to designated beneficiaries, usually one’s children, or retained for their benefit until a defined distribution date.

For example, a couple (the grantors) with minor children may create a trust with themselves as trustees, requiring that in the event of their deaths, the successor trustee will continue to invest the assets for the benefit of the children until the youngest child reaches, say, age 25.  The trustee is usually empowered to use trust funds for post secondary school education, extraordinary, uninsured medical costs or other expenses for which their deceased parents would have used their resources.

Irrevocable Trusts

A grantor establishing an irrevocable trust understands that the assets placed in the trust cannot be retrieved if he or she later decides that the sequestered assets are needed for another purpose.

Often, an irrevocable trust is used to own and hold a life insurance contract.  Annual contributions are made to the trust to cover expenses, including payment of premiums.  The trust provides that at the grantor’s death, the policy proceeds will be used for the benefit of children or other heirs.

This vehicle is especially useful for Special Needs Trusts.  SNTs are authorized by federal statute to benefit individuals who are under age sixty-five at the time the trust was created who have been diagnosed with physical or mental disabilities and who may require public assistance.  While the caregivers, usually parents, of such beneficiaries are alive, they often supplement may the benefits provided by SSI or Medicaid.  Funds in an SNT provide such care after the death of the caregiver.  SNT funds cannot be used for anything that SSI or Medicaid covers, but can be used for other needs.

Irrevocable trusts are also used by taxpayers whose estates are likely to exceed applicable federal estate tax exemptions to shelter some or all of their estates from these taxes.  The estates of individuals dying in 2010 will not be subject to any estate taxation but are subject to capital gains taxation.  However, the estate tax will apply to estates opened in 2011 and thereafter.

Some grantors will transfer assets to an irrevocable trust, but retain the right to receive income from it during their lifetime.  Often, the beneficiary of the assets remaining at the grantor’s death is a charity.  Creation of a charitable remainder trust gives the grantor a charitable tax deduction.

Testamentary Trusts

A living or inter-vivos trust is created by executing a trust agreement.  Once assets are transferred to it, it is effective.

A testamentary trust is created as part of one’s will.  It is not effective until the testator dies.  Testamentary trusts are generally used as a contingency for the benefit of secondary beneficiaries.

For example, a wife’s will may say that “if my husband does not survive me, I leave everything to my two children, A and B.  If A or B dies before I do, the deceased child’s share will be divided among his or her children.”  The will should contain a provision that if those grandchildren are minors, their shares will remain in trust until they reach age 21, or 25, or whatever age the testator believes appropriate.

Trusts have many uses and can be tailored to meet one’s long range estate, investment, tax and charitable planning needs.