TRUSTS: An Overview

Revocable Trusts – A common belief is that trusts are for very wealthy individuals. Today, however, many people with mid-sized estates (over $500,000) are creating trusts for various reasons including those listed below. In short, a trust is a legal document which creates a legal entity which owns property and survives the death of the Grantor/Maker/Settlor causing the trust estate (the Grantor’s assets) to escape the probate process. In the case of a SimpleTrust/Family Trust, the trust owns all of the Grantor’s assets. While the trust entity is created, nothing much changes in the day-to-day life of the Grantor. That is, because the Grantor is usually the trustee of the trust, the Grantor retains control of the trust assets, though he technically does so as a trustee. These trusts are typically revocable or modifiable at any time. In this case, no special trust income tax returns need be filed. Instead, the Grantor reports any income on his usual, individual 1040 return. Most assets can continue to be titled in the Grantor’s individual name with the exception of real estate which must be retitled in the name of the trustee. In so doing, the real estate escapes the time and expense of the probate process as do all other trust assets. Additionally, a trust differs from the disposition of assets by a Will in that a trust is a private entity. The contents and terms of the trust agreement are rarely available to the general public.To the contrary, the probate of a Will is open to the view of the public, including the creditors of beneficiaries. Further, the disposition of assets under a trust can occur immediately (per the terms of the trust agreement), without the necessity of Probate Court approval. Virtually all assets may be transferred, held or owned by a trust including bank accounts, personal property, brokerage accounts, etc. In a revocable trust, any income or gains are taxed at the Grantor’s individual tax rate. A revocable trust does not provide protection against creditors’ claims or a Medicare lien for nursing home services. Still, a revocableSimple Trust/Family Trust is a wonderful estate planning vehicle which avoids probate and maintains confidentiality.

Principal reasons for creating Revocable Living Trusts are:

• To plan for mental disability which will avoid the cost and complications of a court-supervised Guardianship;

• To avoid the expense and delay of the probate process which is open to public view;

• To protect the privacy of your property and beneficiaries after you die;

• To control the timing and rate of asset distribution to beneficiaries who may need protection;

• To regulate distributions to beneficiaries who are without financial management experience; and

• To assist persons who are in need of financial oversight or wealth management.

Irrevocable Trusts – An irrevocable trust, like a revocable trust, creates a legal entity which holds the assets of the Grantor. However, an irrevocable trust may not be revoked and is rarely able to be modified. The Grantor cannot serve as the trustee and may not exercise “control” of the trust or its assets after it is created. Retention of control would convert it to a “revocable trust” subjecting the assets to claims of creditors and possibly defeat its intended purpose. Such an entity may be suitable for people with very serious health concerns predisposing them to an institutional healthcare facility. They may also be viable in many other circumstances including providing for beneficiaries with special needs or who need creditor protection. An irrevocable trust is assigned its own taxpayer ID and the income of the trust, which is not annually passed out to beneficiaries, is taxed at a considerably higher rate. An irrevocable trust may provide protection from creditors so long as the trust was created prior to the liability and was not created specifically to avoid the liability. It may also be of benefit respecting the five (5) year “look-back rule”. Similar to a revocable trust, an irrevocable trust maintains privacy and escapes the probate process.

There are many different types of Trusts, including:

Simple Trust/Family Trust – Often used by a single person or married persons as a plan for care in the event of mental disability or simply to transfer assets upon death without the necessity of probate. The trust survives death and is administered by a trustee.

AB/ABC Trusts – Generally used for the benefit of a surviving spouse, children or other beneficiaries. May take maximum advantage of the marital deduction and other tax advantages. With recent federal tax changes, these are now primarily used by estates valued in excess of $11,000,000.

Irrevocable Life Insurance Trust (ILIT) – Used for the benefit of specified beneficiaries and avoids estate taxes. May generate a gift tax if the value exceeds the unified estate tax exclusion.

Qualified Personal Residence Trust (QPRT) – Permits giving away your residence at some point in the future at today’s value. Used where residence is likely to increase in value.

Grantor Retained Annuity Trust (GRAT) – Permits the gifting of personal property at today’s discounted value.

IRA Trust – Designed to hold your IRA assets after your death for the benefit of your spouse and/or other beneficiaries. Removes value from your estate and defers taxation. Another option is to simply name a beneficiary or beneficiaries of an IRA, 401K or other retirement account which is then transferred to an “inherited IRA” account which is held by a securities broker. Special rules apply and Required Minimum Distributions (RMDs) must be taken according to the age of the holder at his/her death. Taxation is deferred and additional advantages are granted to a spouse.