EXPLORING THE BENEFITS OF TRUSTS
April 11th, 2017 | Richard S. Bishop
Attorney Rick Bishop - Trusts are a complicated subject matter. Creating a trust could be a daunting process. It’s not your typical do-it-yourself project. “Trusts are best handled by a qualified, experienced attorney,” notes HKQ Law’s trust attorney Richard Bishop.
What exactly is a trust?
A trust is an estate-planning and property management tool. To create a trust, the property owner (called the "grantor”, "trustor", or "settlor") transfers legal ownership to a person or institution (called the "trustee") to manage that property for the benefit of another person (the "beneficiary"). The trustee often receives compensation for managing the trust. Under a trust, the trustee has a "fiduciary duty", meaning that the trustee must act solely in the best interests of the beneficiary when dealing with the trust property.
A grantor may name himself or herself as one of the beneficiaries of the trust. The grantor may also act as the trustee and retain ownership instead of transferring the property, but must still act in a fiduciary capacity. (In that case, the grantor should name a successor trustee to act should he or she become disabled or deceased.) If a grantor retains certain powers over or benefits in a trust, the income of the trust will be taxed to the grantor, rather than to the trust.
Types of trusts
There are two broad categories of trusts, "testamentary trusts" and "living trusts." The former transfers property into the trust only after the death of the grantor. If a trust is used to replace or supplement a will, it's a testamentary trust. Living trusts are often preferred over wills because trusts don't have to go through probate, a court-administered process of paying debts and distributing property to heirs upon one's death. However, wills are still important. A will often contains a clause that names the recipient of all property not specifically left to a beneficiary in a trust. Many people include a trust in their wills to reinforce their preferences and goals after death.
A living trust, sometimes referred to as an "inter vivos" trust, commences during the life of the grantor. It may be designed to continue after his or her death. A living trust can be "revocable" or "irrevocable." The grantor of a revocable living trust can change or revoke the terms of the trust any time after the trust starts. The grantor of an irrevocable trust, on the other hand, permanently relinquishes the right to make changes after the trust is created. Living trusts are designed to avoid probate. There may be filing fees for filing the living trust or for transferring property deeds into a trust, but because no court proceedings are involved, court costs are likely to be avoided. Aside from avoiding probate, other common reasons to create a living trust include possibly reducing taxes, ensuring financial privacy, regulating the use of assets, and implementation of the grantor’s intentions.
There are a number of specialized types of trusts, they include (but are not limited to):
AB trusts -- allows married couples with children to reduce or avoid federal estate taxes. By dividing the trust into two parts when one spouse dies. AB trusts reduce the size of the overall taxable estate.
Charitable trusts -- facilitate leaving all or a portion of one’s estate to charity, while enjoying certain tax benefits. These trusts are irrevocable.
Clifford trusts -- allow grantors to transfer assets that produce income into the trust and then reclaim them when the trust expires. These trusts cannot last for a term of less than 10 years plus one day.
Education trusts -- created for the sole purpose of paying for the beneficiary’s education. These trusts can be set up to pay for only tuition, or for any or all expenses of the beneficiary’s education.
Irrevocable life insurance trusts -- formed for the specific purpose of holding a life insurance policy (or policies) on your life. These inter vivos trusts are typically used to remove the life insurance from one’s taxable estate for federal estate tax purposes.
Pet trusts -- created to ensure the continued care of a pet after the owner passes away. In lieu of special arrangements, pets are treated like any other item of personal property.
Special needs trusts -- designed to ensure that disabled or mentally ill beneficiaries don't lose government benefits such as Supplemental Security Income (SSI), Medicaid, vocational rehabilitation, and subsidized housing.
Spendthrift trusts -- protect trust property from a financially irresponsible beneficiary and the beneficiary’s creditors. These property control trusts limit the beneficiary's access to trust principal.
Totten trusts -- created by a deposit in a bank by one person as trustee for another. Income from the trust property is paid to the beneficiary but the property itself reverts back to the settler when the trust expires.
Can you benefit from a trust?
That depends on a number of factors including your age, status, health, goals and estate size.
HKQ Law’s estate planning attorneys can help answer that question. We’ll determine which type of trust or other asset protection tool best meets your specific needs. Countless clients have put their trust in us. Call us at 570-287-3000, or find us online at www.HKQLaw.com.