Trusts
1. What is a trust?
A trust is a very useful instrument in the estate-planning arsenal. Estates can be as different as people, and the flexibility of a trust makes it useful for many different needs. A trust can do a number of things a will can’t do as well, including;
- manage assets efficiently if you should die and your beneficiaries are minor children or others not up to the responsibility of handling the estate;
- protect your privacy (unlike a will, a trust is confidential);
- a trust can protect your assets by reducing taxes;
- if it is a living trust, the trustee can manage property for you while you’re alive, providing a way to care for you if you should become disabled. A living trust also avoids probate, lowers estate administration costs, and speeds transfer of your assets to beneficiaries after your death.
2. Should I have a trust?
It depends on the size of your estate and the goals of establishing the trust. If you mainly want a living trust to protect assets from taxes and probate, but your estate is under the current federal tax floor and small enough to qualify for quick and inexpensive probate in New Jersey, then it would not be worth the administrative cost to prepare the trust. The main advantages of having a trust are if you want to avoid a court hearing if you become incompetent or unable to provide for yourself. Moreover, a trust may be helpful if you want to provide for grandchildren, minor children, or relatives with a disability that makes it difficult for them to manage money.
3. What is the legal importance of having a trust?
A trust is a legal relationship in which one person (or qualified trust company) (trustee) holds property for the benefit of another (beneficiary). The property can be any kind of real or personal property such as money, real estate, stocks, bonds, collections, business interests, personal possessions and automobiles. It is often established by one person for the benefit himself or of another. In those cases, it generally involves at least three people: the grantor (the person who creates the trust, also known as the settlor or donor), the trustee (who holds and manages the property for the benefit of the grantor and others), and one or more beneficiaries (who are entitled to the benefits).
A trust is a contract between the grantor and the trustee. The grantor makes certain property available to the trustee, for certain purposes. The trustee who often receives a fee agrees to manage the property in the way specified. Putting property in trust transfers it from your personal ownership to the trustee who holds the property for you. The trustee has legal title to the trust property.
Trustees have a legal duty to use the property as provided in the trust agreement and permitted by law. The beneficiaries retain what is known as equitable title, the right to benefit from the property as specified in the trust. The donor may retain control of the property. If you set up a revocable living trust with yourself as trustee, you retain the rights of ownership you’d have if the assets were still in your name. You can buy anything and add it to the trust, sell anything out of the trust, and give trust property to whomever you wish.
If you set up the trust by your will to take effect at your death then this is called a testamentary trust. The grantor retains the title to the property during his lifetime, and on his death it passes to the trustee to be distributed to your beneficiaries as you designate. Holding property in trust is a form of ownership that holds it for your benefit.
4. How do trusts operate?
There is no such thing as a standard trust. There are many different types of trusts that can be drafted. The provisions of a written trust instrument govern how the trustee holds and manage the property.
In a living trust, the grantor may be the trustee and the beneficiary. In trusts set up in your will, the trustee is often one or more persons or, for larger estates where investment expertise is required, a corporate trust company or bank.
Trusts can also be revocable. This means that you can legally change the terms and end the trust. A trust can also be irrevocable and it can’t be changed. A revocable trust gives the donor great flexibility but no tax advantages. If the trust is revocable and you are the trustee, then you will have to report the income from the trust on your personal income tax return, instead of on a separate income tax statement for the trust. The theory is that by retaining the right to terminate the trust, you have kept enough control of the property in it to treat it for tax purposes as if you owned it in your name.
Meanwhile, irrevocable trusts offer far less flexibility but there are several possible tax benefits. The trustee must file a separate tax return. Trusts can be very simple, intended for limited purposes, or they can be quite complex, that span two or more generations, provide tax benefits and protection from creditors of the beneficiary, and replace a will as the primary estate planning vehicle.
5. Who needs a trust?
Parents with young children often use a trust as their major estate planning tool. If you have young children, you want to assure a good education for them, and will have enough assets to do so after death. Therefore, young parents should consider setting up a trust. The trustee manages the property in the trust for the benefit of your children during their lifetime or until they reach the ages that you designate. Then any remaining property in the trust may be divided among the children. This type of arrangement has an obvious advantage over an inflexible division of property among children of different ages without regard to their respective ages or needs.
6. What should the assets be used for?
You can specify that the trust pay for education, health care, food, rent, and other basic support. Given the unpredictablity of life, it is often better to write a vague standard (e.g., “for the support of my children”) into the document and allow the trustee the discretion to decide if an expenditure is legitimate. Such a provision also gives the trustee flexibility.
7. When should the assets be distributed?
Some parents pick the age of majority (18) or the age when a child will be out of college (22 or so).
If you have separate trusts and a pretty good idea about each child’s level of maturity, then you can pick the age that seems appropriate for each one to receive his or her windfall.
If you don’t know when each child will be capable of handling money, then you can leave the age of distribution up to the trustee, have the trustee distribute the assets at different times.
Trusts are especially popular among people with beneficiaries who aren’t able to manage property well. This includes elderly beneficiaries with special needs or a relative who may be untrustworthy with money. For example, if you have a granddaughter who has a drug problem, it may be advisable to require her to obtain the money at intervals from a trustee instead of giving her a gift outright in your will. A discretionary trust gives the trustee leeway to give the beneficiary as much or as little he or she thinks appropriate.
Another type of trust is for irresponsible beneficiaries and it is called a spendthrift trust. A spendthrift trust gives the trustee the authority to carefully control how much money is released from the trust and at what intervals. A spendthrift trust keeps an irresponsible beneficiary from the temptation of getting thousands of dollars in at the end of probate. You can stipulate in the trust that the trustee will pay only certain expenses for the beneficiary. These expenses can be only for legitimate expenses such as rent and utility bills. In a spendthrift trust the beneficiary cannot assign his or her interest in the trust, and creditors of the beneficiary can’t get at the principal in a trust, but can make a claim on whatever income the beneficiary receives.
8. What are some other good reasons why people want to have a trust?
People who want to control their property because of family dynamics. Through a trust, you can maintain more control over a gift than you can through a will. Some people use trusts to pass money to a relative when they have doubts about that person’s spouse. For example, you love your son, but don’t trust his wife, and if you are afraid she’ll blow the money you give to your son, then you should leave the money in trust for your son instead of making a direct gift to him. Through a trust you can direct that he get only the income, so neither he nor his wife can squander the principal. In New Jersey, if you leave money in trust to your son then his wife can’t get at the assets if they divorce. Moreover, he can choose how much, if any, of the trust income or principal to leave his wife; if she hasn’t been a good and faithful companion, he can leave the whole thing to whomever he desires.
9. What are some other good reasons to establish a trust?
People who want to provide for administration of their estates if they become physically or mentally unable to do so. People concerned about estate taxes Trusts are very useful to people with substantial assets, because they can help avoid or reduce estate taxes.
10. How do you set up a trust?
If you establish one in your will, then the trust provisions are contained in that legal document. If you create a trust during your lifetime, the provisions are contained in the trust agreement. The provisions of that trust document will determine what happens to the property in the trust upon your death. With any type of trust, one of the most important issues is choosing the trustee.
11. How is a trust funded?
A testamentary trust is funded after your death, with assets that you have specified in your will and through beneficiary designations of your life insurance, IRA, and so on. If your estate with life insurance benefits included will add up to more than $1 million, then you can save taxes by removing the life insurance proceeds from your estate and establishing an irrevocable life insurance trust that owns the policy. However, all incidents of ownership in the policy belong to the trust. When you die, the proceeds are paid into the trust. An irrevocable life insurance trust escapes estate taxation and creditors in so far as the insurance policy is concerned.
12. How can a trust be terminated?
Your trust agreement should contain a clause that provides how it can be terminated. A well prepared trust drawn up by a lawyer will certainly have such a clause. A trust often terminates when the principal is distributed to the beneficiaries, at the time stated in the trust agreement. For example, you might provide that a trust for the benefit of your children would end when the youngest child reaches a certain age. At that time, the trustee would distribute the assets to the beneficiaries according to your instructions.
You can also give your trustees the discretion to distribute the trust assets and terminate the trust when they think it’s a good idea, or place some restrictions on their ability to do so. For example, you could allow the trustees to terminate the trust in their discretion, provided that your son has completed his college education. All trusts should have a termination provision.
13. What if I set up a trust, and then move to Florida? Which law then applies?
State law governs trusts. If the trust involves real estate, then the law of the state where the property is located applies. If it’s personal property, like a car or money, or most other things, the law of the state where the grantor created the trust will probably control. If you have residences in more than one state, you can provide in your trust which of those states’ laws will control the disposition of your real property.
14. What are the different types of trusts?
a. Charitable trusts – Charitable trusts are created to support some charitable purpose. These trusts often will make an annual gift to a worthy cause of your choosing. The bestpart of a charitable trust is that it reduces the taxes on your estate.
b. Discretionary trusts – Discretionary trusts permit the trustee to distribute income and principal among various beneficiaries or to control the disbursements to a single beneficiary, as he or she sees fit.
c. Insurance trusts – Insurance trusts are tax-saving trusts in which trust assets are used to buy a life insurance policy whose proceeds benefit the settlor’s beneficiaries.
d. Living trusts – A living trust enables you to put your assets in a trust while still alive. You can have many roles in a living trust. You can be the donor, trustee, and beneficiary.
e. Medicaid qualifying trusts – Medicaid trusts are trusts that may help you qualify for federal Medicaid benefits by placing certain property in a trust. Thus, in these trusts you are limiting your assets for Medicaid purposes. This type of trusts is mostly used when family members are concerned with paying the costs of nursing home care.
f. Revocable trusts – Revocable trusts are trusts that can be changed, or even terminated, at any time by the donor. Most living trusts are revocable.
g. Irrevocable trusts – A irrevocable trust cannot be changed or terminated before the time specified in the trust. The loss in flexibility in an irrevocable trust is offset by savings in taxes.
h. Spendthrift trusts – A spendthrift trust is set up for people whom the grantor believes wouldn’t be able to manage their own affairs. Quite commonly these trusts are used to insure that an inheritance given to extravagant relative, or someone who’s mentally incompetent are not blown. They may also be useful for beneficiaries who need protection from creditors.
i. Support trusts – These trusts direct the trustee to spend only as much income and principal as may be needed for the education and support of the beneficiary.
j. Testamentary trusts – A testamentary trust are set up in wills.
k. Totten trusts – These trusts are not really trusts at all. They are simply bank accounts that pass to a beneficiary immediately upon your death.
15. What are the other five major reasons to have a trust?
a. Trusts are generally more difficult to contest than wills.
b. Trusts can be flexible; you can authorize that payments fluctuate with the cost of living, allow extra withdrawals in case of an emergency, or even set a standard figure for payment each year; if the income doesn’t meet that amount, the difference can be made up out of the principal.
c. Trusts can be used to impose discipline on the beneficiary. You could require the beneficiary to live within a set figure, getting a certain amount of income each year, regardless of inflation, need, or the stock market’s effect on the principal.
d. Trusts are sometimes set up in divorce, for example to provide for the education of the couple’s children.
e. Trusts can also be helpful if you want to make a major charitable gift but wish to retain some use of the property.
