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From delaying a beneficiary’s receipt of an inheritance, to preventing the loss of government benefits to avoiding probate and minimizing negative tax consequences, trusts come in all different shapes and sizes and achieve a variety of positive outcomes.  With that said, a trust may not be the right solution, or even necessary, as every client’s situation and desired goals are different.  It is important to understand what goes into a trust, as well as having an idea as to the types of trusts which can be created, so an educated decision can be made as to whether a trust is right for you.

What is a Trust and How Can One be Created?

A trust is a document which memorializes the transfer of ownership of property from the creator of the trust (grantor) to the fiduciary responsible for the safekeeping and distribution of the property of the trust (trustee) for the benefit of the beneficiaries of the trust.  Virtually any type of property can be transferred to a trust and how the property is distributed is up to the grantor. The starting point is deciding what property should be held in trust. One of the most crucial decisions to make is selecting the trustee.  This person has a lot of responsibility and, as the custodian of your property, you will want to make sure you trust the person and believe he or she will act in the best interests of the beneficiaries of the trust.

The intent of the trust, the purpose for its creation, is also a key consideration.  If there is concern that a beneficiary is too young or financially unsavvy, or would otherwise irresponsibly spend down an inheritance, creating a trust is a practical way to preserve the inheritance and make distributions at appropriate ages or milestones.  Similarly, recipients of government benefits such as Medicaid, Supplemental Security Income or Social Security Disability Income have certain income and asset restrictions. A large direct inheritance will almost always disqualify that person from receipt of those benefits, whereas funds held in a properly-structured trust can allow the recipient to still receive his or her benefits.  Assets held in trust do not pass through probate and the trust document itself is also not a public document.  Avoiding probate streamlines the estate administration process, allows for quicker distribution of assets and can save significant costs depending on that State’s probate laws. Wealth preservation and minimization of estate and income taxes is also common reason for utilizing a trust.  Almost always, an irrevocable trust is utilized which minimizes taxes by removing the asset from a person’s estate, but also means, usually, the person will have to relinquish control of the asset.

Care must be given to deciding how and in what manner to distribute the income and principal of the trust.  Trusts in which all income payable to the trust is automatically distributed to the beneficiaries is called a conduit trust, and usually those beneficiaries are responsible for the income tax earned; whereas, trusts in which income is retained by the trustee, either by direct mandate of the grantor or at the discretion of the trustee, is considered an accumulation trust and the trust is responsible for paying income taxes on the income retained.  Knowledge of the assets to be invested, financial circumstances of the beneficiaries and potential taxing scenarios is crucial when making these determinations.

How is a Trust Funded?

One of the biggest mistakes is taking the time to draft a trust that accomplishes every estate planning goal but then failing to take the next step and actually fund the trust.  This is a relatively simple task and simply requires the following:

Bank/Brokerage Accounts
Fill out a change of ownership form, thus titling the account in the name of the trust;

Retirement Accounts/Life Insurance Policies
Fill out a beneficiary designation form naming the trust as beneficiary of the account/policy;

Real Estate
Prepare a new deed to transfer the property to the trustee of the trust;

Tangible Personal Property
For items such as jewelry or memorabilia, write a signed and dated letter to the trustee listing the items to be transferred to the trust.

Of course, whether a certain asset should be transferred to a trust is a separate inquiry as there could be negative cost basis or income tax consequences associated with such transfer.  An asset transferred to a trust carries with it the cost basis of the grantor and eliminates the ability for the value of such asset to be “stepped up” to the date of death value.  Thus, placing a highly-appreciated stock in trust could lead to a significant capital gain which could have been eliminated altogether if kept in the grantor’s estate until date of death.

Given the numerous considerations which go into creating a trust, it is important to work with counsel who understands how these pieces work together and can identify and avoid any potential pitfalls.  If you would like to learn more about trusts or think it may be a beneficial addition to your estate plan, please feel free to contact us to arrange a free consultation.  We have offices in mid-town Manhattan and Wayne, PA and will make every effort to accommodate your needs and help you accomplish your goals.

Q: Is my trust a public record?

A: No. Although a Will is public record, one of the benefits of a trust is it is kept private.

Q: Can I serve as my own trustee?

A: It depends on the type of trust. For instance, you can be the trustee of your personal revocable trust, but for many irrevocable trusts, including self-settled needs-based trusts and trusts designed for asset protection or tax-reduction purposes, another person must be the trustee.  

Q: Is an irrevocable trust really irrevocable?

A: Generally, no. Common law and state statutes often provide mechanisms to modify or terminate irrevocable trusts, and usually this can be accomplished by the trust settlor and all beneficiaries agreeing to it. However, some trusts, notably charitable trusts, cannot be revoked after their creation.

Q: What is a trust protector?

A: Another potential party to a trust document. Typically, this person is either unrelated to the trust creator to ensure the intent of the trust is carried out. The powers can be limited or broad, and often include the power to: remove and replace a trustee, change the situs location of the trust and even to change the terms of the trust to conform with updates in the applicable law.  

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