Over my career in working with individuals on estate planning I often get asked about trusts. “Trust” is a buzzword that often implies an individual has done thorough estate planning. The person feels good about it and conveniently forgets about the planning over time. But what is a trust and what is it supposed to do for an individual? This month’s article focuses on that question to remind people that a trust’s purpose should be reviewed regularly and should be given serious consideration at the beginning before implementation.
A trust has three basic individuals who play key roles in the operation of a trust. One person might fill all three roles, or three individuals can each fill a role. Those roles are:
Grantor—the person who establishes the trust, and usually names the other individuals, as well as the terms of the trust.
Trustee—the person appointed to carry out the terms of the trust and to protect the beneficiary to be sure assets are secured. More than one trustee can be appointed by the Grantor.
Beneficiary—the person who receives the assets under the terms of the trust. The beneficiary might receive assets over a period of years, or upon completion of certain conditions, or both. Multiple beneficiaries may be named by the Grantor and in differing percentages. Each beneficiary may be subject to different conditions to receive the assets, too.
The final step in establishing a trust is to contribute property to a trust. Without property, a trust has no value or purpose because the trustee has nothing to take care of and the beneficiary has nothing to receive.
If you are interested in discussing these ideas further, please contact our office to set an appointment. We look forward to seeing you and hope all is well with you until then. Thank you.
Types of Trusts
A trust is either revocable or irrevocable.
A revocable trust is commonly used for living trusts. An individual seeking to protect assets in a trust may utilize a revocable trust and later terminate the trust, if the trust’s purpose has expired or the Grantor determines that the trust is no longer useful. Then all assets may be distributed back to the Grantor from the trust and the trust is dissolved.
The most common reason for establishing a revocable trust is to place property in a legal entity (i.e., the trust) to avoid probate. Probate can be time consuming, expensive, and public. Using a revocable trust to hold property means that the trust property is not subject to property and has already been transferred to potential heirs under the terms of the trust.
A revocable trust usually finds the Grantor naming him/herself as the trustee and beneficiary while alive, but then naming successors as trustees and beneficiaries upon the Grantor’s death. The trust then continues to exist and the successor trustee simply manages the property on behalf of the beneficiary.
An irrevocable trust is commonly used to shed property from an individual’s ownership and control. Why might an individual want to avoid ownership and control? Believe it or not, there are multiple reasons. The most common is to avoid estate taxes. A wealthy person who owns an estate in excess of approximately $5.5 million in 2018 would find their estate subject to estate taxes upon their death. One way to decrease the value of their estate is to move property from the individual to an irrevocable trust.
The second reason for using an irrevocable trust is to remove all property owned by an individual such that the individual would qualify for public medical assistance if entering a nursing home or other long-term care facility. There are multiple other laws surrounding this type of planning that are not addressed by this article. It is advisable to seek professional assistance if this idea is of interest to you.
Common Uses of Trusts
Revocable Living Trusts
This type of trust was mentioned earlier. Most estate planning seminars address the use of RLT’s as a common replacement for wills. They should not be considered to be so. Often an individual has property in his/her own name as well as property in the RLT. But if the individual still has property in his/her name, a will is still necessary as that property will be subject to probate. But the probate will likely be greatly simplified, with less cost, and publicly available only to the probatable property. The RLT property will retain privacy and will bypass probate.
Irrevocable Life Insurance Trusts
An ILIT is often used by an individual to provide cash to pay for potential estate taxes. The ILIT holds a life insurance policy that is funded by the individual, usually with annual premiums. ILIT’s are unique because contributions are subject to the gifting rules under the federal Internal Revenue Code. Beneficiaries of the ILIT are to given the opportunity with each annual contribution to take their share as a gift, although they usually do not. Something called a Crummey Letter (named after a well known district court case) must be issued to the beneficiaries each year alerting them to this opportunity.
Charitable trusts are generally irrevocable and may be named charitable lead trusts or charitable remainder trusts. A charitable lead trust provides a charitable contribution initially to a tax-exempt nonprofit organization, with anything left to go to named beneficiaries. A charitable remainder trust does the opposite, where the beneficiary is taken care of first, and anything left goes to a charity for its use.
This article intends to simply provide initial basic information on trusts for individuals unfamiliar with such legal tools. Trusts of all types have other features and responsibilities not addressed in this article due to space and knowledge level restraints.
This article does not intend to provide any tax or legal advice but suggests that you contact an appropriate professional to consult with on your specific situation and whether these ideas meet with your goals and objectives.