Trusts

 

The term trust describes the holding of property by a trustee (which may be one or more persons or a corporate trust company or bank) in accordance with the provisions of a written trust instrument for the benefit of one or more persons called beneficiaries. A person may be both a trustee and a beneficiary of the same trust. A trust created by your will is called a testamentary trust and the trust provisions are contained in your will.


If you create a trust during your lifetime, you are described as the trust's grantor, settlor, or trustmaker, the trust is called a living trust or inter vivos trust, and the trust provisions are contained in the trust agreement or declaration. The provisions of that trust document (rather than your will or state law defaults) will usually determine what happens to the property in the trust upon your death.


A living trust may be revocable (subject to change and terminated by the trustmaker) or irrevocable. Either type of trust may be designed to accomplish the purposes of property management, assistance to the trustmaker in the event of physical or mental incapacity, and disposition of property after the death of the trustmaker of the trust.


Trusts are not only for the wealthy.


Many young parents with limited assets choose to create trusts either during life or in their wills for the benefit of their children in case both parents die before all their children have reached an age deemed by them to indicate sufficient maturity to handle property. This permits the trust estate to be held as a single undivided fund to be used for the support and education of minor children according to their respective needs, with eventual division of the trust among the children when the youngest has reached a specified age. This type of arrangement has an obvious advantage over an inflexible division of property among children of different ages without regard to their level of maturity or individual needs at the time of such distribution.


What is a Revocable Living Trust?


Much has been written recently regarding the use of "living trusts" (also known as a "revocable trust" or "inter vivos trust") as a solution for a wide variety of problems associated with estate planning through wills. Some attorneys regularly recommend the use of such trusts, while others believe that their value has been somewhat overstated. The choice of a living trust should be made after consideration of a number of factors.


This brief summary is intended to provide a framework of basic knowledge regarding "living trusts" in general, in order that you might determine whether you should pursue a discussion of this technique further with me.


The term "living trust" is generally used to describe a trust

(a) which you can create during your lifetime, and

(b) which you can revoke or amend whenever you wish to do so. You can also create an "irrevocable" living trust, but that is permanent and unchangeable and is almost exclusively done to produce certain tax results beyond the scope of this summary.


A "living trust" is legally in existence during your life, has a trustee who is currently serving, and owns property which (generally) you have transferred to it during your life. While you are living, the trustee (who may be you) is generally responsible for managing the property as you direct for your benefit. Upon your death, the trustee is generally directed to either distribute the trust property to your beneficiaries, or to continue to hold it and manage it for the benefit of your beneficiaries.


Like a will, a living trust can provide for the distribution of property upon your death. Unlike a will, it can also

(a) provide you with a vehicle for managing your property during your life, and

(b) authorize the trustee to manage the property and use it for your benefit (and your family) if you should become incapacitated, thereby avoiding the appointment of a guardian for that purpose.


Annuities and Retirement Benefits


You may be entitled to receive some type of retirement benefit under an employee benefit plan offered by your employer or have an Individual Retirement Account (IRA). Typically, a deferred compensation or retirement benefit plan will provide for the payment of certain benefits to beneficiaries designated by the employee in the event of the employee's death before retirement age. After retirement, the employee may elect a benefit option that will continue payments after his or her death to one or more of the designated beneficiaries.


Certain spousal annuities are mandated by law and may be waived only with the spouse's properly witnessed signed consent. The various payment options will be treated differently for tax purposes. Any person entitled to retirement benefits should seek competent advice as to the payment options available under his or her retirement plan and the tax consequences of each.


Using a proper trust used can “Stretch out” the distributions and maximize the value of the IRA over the lives of the individual beneficiary.

Conduit, Accumulation, Look-through.


Life Insurance


If you own life insurance on your own life, you may either

(a) designate one or more beneficiaries to receive the insurance proceeds upon your death, or 

(b) make the proceeds payable to your probate estate or to a trust created by you during your lifetime or by your will.


If the insurance proceeds are payable to your estate, they will be distributed as part of the general estate in accordance with the terms of your will or, if you die without a will, the distribution will be according to the applicable laws of intestate succession. If the proceeds are payable to a trust, they will be held and distributed in the same manner as other trust assets and may also be free of creditors' claims. Insurance proceeds that are payable directly to a minor child will generally necessitate the court appointment of a legal guardian or conservator. This can be avoided by having a trust designated as beneficiary or a custodial account under the state-transfers-to-minors law.


Insurance plays an important role in estate planning and should be coordinated with all other aspects of your estate plan. The laws pertaining to the taxability of insurance proceeds are complex, however, so it is important that all matters pertaining to life insurance be carefully reviewed with your attorney and insurance advisor.


If you'd like more information about trusts, please call me at (586) 254-9200 or (248) 409-0256.


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