Estate Planning

— Trusts —

What is a Trust?

A trust is a fictitious legal entity which owns assets for the benefit of a third person (beneficiary). The Grantor of the Trust is the person who set up and gave money to the Trust. The Trustee of the Trust is the person charged with keeping the assets safe, invested properly, and finally distributed to the Beneficiary at the proper time. The Grantor can pretty much decide how the money must be kept (in interest bearing accounts, in real estate, or only in government insured FDIC accounts, etc.), and when it may be distributed (when the beneficiary is 18 years old; or one half when the beneficiary turns 18 and the other one half when the beneficiary turns 21, etc.). The Grantor of the Trust can also be the Trustee of the Trust, if the Grantor decides to set the Trust up in such a manner (e.g., Grantor sets him/herself up to be the Trustee of a Trust for his/her child).

When should I consider preparing Trusts as part of my estate plan?

Because children are not considered capable of handling their own financial affairs, state laws require that a guardianship for the benefit of the minors be established. A guardianship has at least two main disadvantages: 1) similar to a probate proceeding, most or all actions require court approval, there is need or extensive court supervision and corresponding attorney’s fees and costs; 2) a court will generally not allow investment of funds into anything but a FDIC protected type of investment (i.e., an insured bank account offering 2 – 3% return). Mutual funds or other investment options are generally off limits. With a trust, you can invest in high-yield options so your child could receive substantially more. Also, a trust allows such funds to be held by a Trustee and disbursed as needed by the minor for education or other demonstrable need, giving the Trustee much more control over how the funds are disbursed to the child.

If a decedent’s estate is worth more than $675,000, it is subject to estate taxes. So, if a decedent had $1,000,000 in assets, it would be subject to $153,000 in estate taxes. For a married couple, a properly drawn A/B Trust results in the first $1,200,000 of their assets being protected, instead of only $675,000. Thus, the $78,000 in Estate Taxes would not have to be paid and could instead go to the heirs.

If you own real estate in several states, placing some of the real estate in a Trust prior to death may avoid unnecessary probate expenses.

Trusts can be included in your will or prepared separately.

Because Trusts can be quite complicated, it is in your best interest to seek legal counsel to assure your plan goes as smoothly as possible.

What kinds of Trusts are available for me to set up?

The following are some of the more common Trusts set up. Other Trusts are available. Consult an Estate Planning Attorney for more information.

• Living Trust: Prepared while the Testator is still alive.
• Spendthrift Trust: Protects the beneficiary of your Trust from creditors.
• Bypass Trust: (also known as an A-B Trust): Designed for married couples with a combined estate of over $675,000.
• Totten Trust: Best for amounts of $20,000 or less.
• Testamentary Trust: A provision in a long Will. This type of Trust can be irrevocable and can take on the same qualities as the Spendthrift, Bypass, and Totten Trusts.

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 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 $675,000 to be exempt from estate tax if one or the other dies.

A Bypass Trust is designed to let the $675,000 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 $675,000, a significant amount of estate taxes will be due before the beneficiaries can receive their inheritance.

What is a Totten Trust?

Setting up a Totten Trust is as simple as going to a bank and opening an 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 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.

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 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.