Trusts
A trust is a legal arrangement that allows an individual (the grantor) to transfer ownership of assets to an entity (the trustee), who manages those assets for the benefit of designated individuals (the beneficiaries). Trusts can hold various types of assets, including cash, real estate, and investments. They are categorized into revocable and irrevocable trusts; revocable trusts can be altered or terminated by the grantor during their lifetime, while irrevocable trusts cannot be changed once established. Additionally, trusts can be testamentary, becoming effective after the grantor's death, or living trusts, which are created during the grantor's lifetime.
One of the primary purposes of establishing a trust is to avoid the probate process, which can be lengthy and costly. Trusts provide privacy since they do not go through the court system, unlike wills. They can also protect and manage assets for beneficiaries, allowing the grantor to set specific conditions for asset distribution. While commonly associated with wealthy individuals, trusts can be beneficial for people with moderate means as well, offering flexibility and control over their estate planning. Different types of trusts cater to specific needs, such as spendthrift trusts for beneficiaries with spending challenges or charitable trusts for philanthropic intentions.
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Trusts
A trust is a legal agreement that transfers the ownership of assets to an entity that holds those assets for the benefit of one or more persons. The creator of a trust is called the "grantor" or "donor." The person who manages the trust is the trustee. The persons who benefit from a trust are the beneficiaries. The grantor, trustee, and the beneficiary may be the same person. When this is the case, the grantor names a successor trustee. The successor trustee becomes the trustee upon the death of the grantor. A trust can hold any assets. These may include cash; houses and other real estate; bank, brokerage, and investment accounts; stocks, bonds, and annuities; motor vehicles; and other personal property.
Trusts may be revocable or irrevocable. A revocable trust can be changed at any time during the grantor’s lifetime. The grantor can revise the terms of the trust, add or remove assets to the trust, and terminate the trust. An irrevocable trust cannot be changed. Once it has been created, its assets belong to the trust and can only be removed, or distributed, per the terms of the trust.
Trusts are classified as either testamentary trusts or living trusts. A testamentary trust goes into effect after the grantor’s death. It is created by instructions in the grantor’s will. All testamentary trusts are irrevocable. A living trust, also known as an "inter vivos trust," is created during the grantor’s lifetime. Living trusts can be either revocable or irrevocable. Once the grantor dies, they become irrevocable, or unchangeable.
People set up trusts to avoid probate, reduce taxes, provide for others, and protect and manage assets.
Background
State laws govern trusts, and laws vary from state to state. Several states have adopted statutes based in part on the Uniform Trust Code, a set of regulations that attempts to standardize state statutes on trusts.
Most people set up a trust through a lawyer. Although it is possible for individuals to set up a trust on their own, using an attorney who specializes in estate and trust law can help to ensure that the trust provisions clearly meet the grantor’s intentions and will stand up to any potential legal disputes following the grantor’s death. Setting up a trust involves identifying the assets are to be included in it, how those assets are to be invested, the person who will manage the trust, and how those assets are to be distributed among the beneficiaries. In addition, the trust may include provisions about the trustee’s role, cost-of-living adjustments, and any restrictions on how the trust’s assets can be used.
The lawyer prepares a document called a "trust agreement" or "declaration of trust," which specifies the terms of the trust. It lists the assets that fund the trust. For an irrevocable trust, this requires transferring the ownership of the assets and giving up all rights to those assets. For a revocable will, the grantor may fund the trust with as little as one hundred dollars. Other assets may be added to the trust at any time by transferring the ownership of those assets from the individual to the trust. Those assets, such as a house or bank account, can continue to be used by the grantor during the grantor’s lifetime. The grantor of a revocable trust maintains the trust by ensuring that any assets acquired after the time the trust has been established are titled in the name of the trust. This involves naming the trust the owner of vehicles, bank accounts, bonds, and stocks. Assets such as retirement accounts and life insurance policies name a beneficiary who will receive those assets following a death. If the grantor wants those assets to be part of the trust, the trust must be named as the beneficiary.
When setting up a living trust, a grantor typically creates a will that transfers into the trust any assets that are not titled in the trust or designated to beneficiaries. This is called a "pour-over will." If the assets are not transferred to the trust and there is no pour-over will, they remain part of the estate. If the trust contains no assets at the time of death and none are passed to the trust through a pour-over will, the trust is considered null and void.
One of the main reasons people set up living trusts is to avoid probate. Probate is a legal process in which the court oversees the division of an estate after a person dies. A trust does not need to be administered by the court; thus, it bypasses the court’s involvement. Depending on the state, this may result in a much simpler process and shorter time period to distribute assets following a person’s death. After collecting all assets, processing all debts and liabilities, and preparing an accounting, the trustee generally is able to distribute the trust’s assets to the beneficiaries. Because the court does not need to oversee these actions, this process typically goes faster than probate and allows beneficiaries to receive assets sooner than they would through probate. A trust also allows for privacy. Unlike a will, which must be filed with a court, the trust is not filed with the court or made public. This is often an important issue for very wealthy individuals who do not want to reveal their financial holdings.
Trusts Today
Trusts are often presumed to be the province of the wealthy, but they are an important estate tool for people of moderate means as well. Trusts can help protect individuals’ assets for the benefit of others, allow for gifts to charities, and prevent the need for probate.
The desire to avoid probate is one of the main reasons individuals set up trusts. In many states, probate is a costly and lengthy process that typically requires expenses for a lawyer and court fees. Because a court does not oversee the distribution of assets in a trust, the successor trustee typically can distribute trust assets after a person dies without incurring those legal expenses.
Some people may desire court supervision of their assets, especially when there are contentious relationships among family members or people who have been bequeathed property. In such cases, probate may be preferred and a trust would not serve the decedent’s purposes.
As of 2015, the Internal Revenue Service (IRS) exempts $5,430,000 from estate taxes. If an individual’s estate is greater than $5,430,000, removing the excess money and putting it in a trust will reduce, or even eliminate, the amount of taxes the estate owes following an individual’s death. However, for estates with assets less than $5,430,000, it may not make sense to make a trust if the only reasons are to avoid estate taxes because the estate is already exempt. Furthermore, the desire to avoid the expense and hassle of probate may not be a sufficient reason for establishing a trust. Several states have simplified the probate process. If the grantor lives in one of those states, probate may go quickly and be less costly than paying to set up a trust.
A trust makes sense when a grantor wants assets to be protected or managed for the benefit of others. Trusts allow grantors to specify how they want their assets to be used. When setting up the trust, grantors can include provisions that limit the use of the assets until a beneficiary reaches a certain age, specify how the assets can be used, or allow a beneficiary to receive only interest earned from assets, rather than the assets themselves. The latter is often called a "spendthrift trust" or "spendthrift provision." It may be used when the grantor wants to provide money to help support a beneficiary and fears that a beneficiary may spend all of the money recklessly or in a short period of time. Grantors may specify how the assets may be used, such as for the education of their children. Similar trusts may be set up to provide for the support of elderly or disabled persons.
A grantor may want to set up a trust that gives money to future generations, such as grandchildren. This type of trust is known as a "generation-skipping trust." It can be funded with a large gift that generates income or a set amount that is designated for a specific purpose, such as the grandchildren’s education.
Other types of trusts include charity trusts. These come in many forms. One type of charity trust allows grantors to leave assets, such as a house or real estate, to a charity but to continue using it during their lifetime.
Trusts are used for a variety of purposes. They allow people control over who will receive their assets after their death and can provide protection of assets for the benefit of others. In some cases, these goals can be realized with a will or other estate-planning tools. In other cases, however, a trust is the best tool for achieving these goals. Similarly, a trust is beneficial when individuals want to maximize their assets or when they have estates that exceed the tax-exempt maximum.
Bibliography
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Ngai, Victor. "Back to the Basics of Estate Planning." CPA Journal 85.1 (2015): 58. Associates Programs Source Plus. Web. 22 June 2015.
Pratt, David, and Nathan R. Brown. "Estate Planning in 2015 and Beyond: No Longer a One-Size-Fits-All Approach." Florida Bar Journal 89.2 (2015): 24–30. Academic Search Complete. Web. 22 June 2015.
"Trust Code Summary." Uniform Law Commission. Natl. Conference of Commissioners on Uniform State Laws, 2015. Web. 18 June 2015.
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United States. "Understanding Trusts." USA.gov. United States Govt., 28 May 2015. Web. 18 June 2015.