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Trust BasicsWhether your client is seeking to manage his own assets, control how those assets are distributed after his death, or plan for potential incapacity, trusts can help in accomplishing major estate planning goals. The power of trusts stems partly from their versatility and their ability to solve the unique needs and desires of each grantor; many types exist, each designed for a specific purpose. While trust law is complex, and establishing a trust requires the services of an experienced attorney, the basics aren’t hard to grasp.
[Top] What is a trust?A trust is a legal entity that holds assets for the benefit of another. Basically, it's like a container that holds money or property for somebody else. You can put practically any kind of asset into a trust, including cash, stocks, bonds, insurance policies and real estate. What you choose to put in a trust depends largely on your goals. For example, if you want the trust to generate income, you may want to put bonds in your trust. If you want to create a pool of cash accessible to pay any estate taxes due at your death, or to provide for your family, you might want to fund your trust with a life insurance policy.
The person who creates and funds a trust is called the grantor (or sometimes, the settlor or trustor). The grantor names people, known as beneficiaries, who will benefit from the trust. Beneficiaries are usually family members or loved ones but can be anyone, even a charity. Beneficiaries may receive income from the trust or may have access to the principal of the trust either during the grantor’s lifetime or after the grantor dies.
To oversee the trust, the grantor names an individual or a company, such as AST Capital Trust, to act as trustee. The trustee is responsible for administering the trust and distributing income and/or principal according to the terms of the trust. The grantor can name more than one trustee for a single trust.
[Top] Why create a trust?While trusts can be used for many purposes, they are particularly popular estate planning tools. Trusts are often used to:Minimize estate taxes
Shield assets from potential creditors
Avoid the expense and delay of probating a will
Preserve assets for children until they are grown
Create an investment pool that can be managed by professional money managersSet up a fund for the grantor’s own support in the event of incapacity
Shift part of the grantor’s tax burden to beneficiaries in lower tax brackets
Provide benefits for charity
The type of trust used, and the mechanics of its creation, will differ depending on what your client is trying to accomplish. In fact, your client may need more than one type of trust to accomplish all of his goals.
[Top] Duties of the trusteeThe trustee is a fiduciary, meaning the trustee owes a special duty of loyalty to the beneficiaries. The trustee must act in the best interests of the beneficiaries. For example, the trustee must preserve and protect trust assets for the benefit of the beneficiaries. The trustee also must keep complete and accurate records and exercise reasonable care and skill when managing the trust. A trustee may hire professionals such as attorneys, accountants, brokers and bankers if it is wise to do so. However, the trustee cannot merely delegate its full responsibilities to someone else.
Although state law establishes many of the trustee’s duties, others are defined by the trust document. If your client is the grantor, you can work with your client's attorney and AST Capital Trust to help determine some of these duties when your client sets up the trust.
[Top] Living or Revocable TrustsA living trust is a special type of trust. It is a legal entity your client creates to own assets, such as mutual funds or a house. Assets passing through a living trust are not subject to probate; they don't get treated like property in a will. This means the transfer of assets through a living trust is not held up while the probate process is pending. Instead, the trustee transfers the assets to the beneficiaries according to the grantor’s instructions. The transfer can be immediate or delayed. For example, the grantor can direct the trustee to hold the assets until some specific time, such as the marriage of the beneficiary or their attainment of a certain age.
Living trusts are attractive because they are revocable. The grantor maintains control and can change or even terminate it during his lifetime. Living trusts also are private. Unlike a will, a living trust is not part of the public record. No one can review details of the trust documents unless the grantor allows it.
Living trusts also can be used to protect and manage assets should the grantor become incapacitated. If the grantor can no longer manage his own affairs, the trustee will step in and manage the trust assets. The trustee has a duty to administer the trust according to its terms, and must always act with the beneficiary’s best interests in mind. In the absence of a trust, a court could appoint a guardian to manage your client’s property should he become incapacitated.
Despite these benefits, living trusts have some drawbacks. Assets in a living trust are not protected from creditors, and the grantor is subject to income taxes on income earned by the trust.
[Top] Irrevocable TrustsUnlike a living trust, an irrevocable trust cannot be changed or dissolved once it has been created, and it can provide creditor protection, income tax reduction and immediate estate tax benefits. The grantor generally cannot remove assets, change beneficiaries, or rewrite any of the terms of the trust. These restrictions make an irrevocable trust a valuable estate planning tool and, as noted, may provide significant tax benefits for the grantor.
Grantors fund irrevocable trusts only with assets over which they are willing to relinquish control. With proper planning, these assets, plus all future appreciation on the assets, may fall outside the grantor’s taxable estate. This means your client's ultimate estate tax liability may be less, resulting in more assets passing to beneficiaries. Assets transferred to beneficiaries through an irrevocable trust also avoid probate. As a bonus, assets in an irrevocable trust may be protected from creditors.
There are many different kinds of irrevocable trusts. Some have special provisions and are used for special purposes. Others hold life insurance policies or personal residences. Irrevocable trusts can even be set up to generate income for the grantor.
[Top] Self-Settled TrustsDelaware law allows your clients to create irrevocable, self-settled trusts. These often are called Delaware asset protection trusts (DAPTs). A self-settled trust is a trust in which the person creating the trust (the grantor) can name himself the primary beneficiary. Importantly, the trustee has the discretion to distribute or not distribute the trust property. Since creditors can only reach assets the beneficiary has the right to receive, the trust’s assets are not considered the beneficiary's property, and creditors are unable to reach it if properly established.
[Top] Testamentary TrustsTestamentary trusts are established by the terms of a will. Such trusts don't come into existence until the will is probated. At that point, selected assets passing through the will can "pour over" into the trust. From that point on, the trust works very much like other trusts. The terms of the trust document control how the assets within the trust are managed and distributed. Since the grantor has a say in how the trust terms are written, these types of trusts give the grantor a great degree of control over how the assets are used.
[Top] Special Needs TrustsSpecial needs trusts benefit disabled individuals who receive litigation settlements or whose future care is covered by a parent’s estate plan. A special needs trust (SNT) will maintain a disabled individual’s eligibility for critical government benefits, shelter assets from creditors and protect the individual from financial exploitation.
[Top] Charitable TrustsA charitable remainder trust is a specific type of irrevocable trust used to make a substantial gift to a charity. Although a CRT may be funded with cash, grantors more often fund them with highly appreciated stock, real estate or closely held business interests as a means of deferring capital gains taxes on those assets. The trust pays income to the beneficiary, usually the grantor and his or her spouse, for a specified period of time (usually their lifetime), after which the remaining assets in the trust pass to the named charity or charities. In addition to deferring capital gains taxes on appreciated assets put into a CRT, the grantor receives an income tax deduction for the present value of the gift.
[Top] The U.S. Charitable Gift Trust™ The U.S. Charitable Gift Trust™ is a nonprofit public charity structured to receive donations from individuals, corporations and others and make grants to a wide variety of charitable organizations throughout the United States. In addition, The U.S. Charitable Gift TrustTM sponsors several pooled income funds.
Pooled income funds are funds established to receive contributions from multiple donors. Donors may be eligible for an income tax deduction on assets they donate. During their lifetimes, donors or his/her designated beneficiary receives a prorated share of the income generated by the trust, after which the balance of their assets in the fund are given to their designated charity or charities.
AST Capital Trust serves as the trustee, and provides administrative services for, The U.S. Charitable Gift TrustTM. For more information, contact www.uscharitablegifttrust.org[Top] ConclusionEstate planning is a complicated but necessary part of your client’s life. As your client's advisor, you should become familiar with basic estate planning concepts like trusts. Fortunately, you don’t have to do it on you own. With the help of experienced estate planning professionals such as your client's estate planning attorney and AST Capital Trust, you can confidently help your client plan for the orderly transfer of assets to others.
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