What Is A Trust? Why Is It Useful?
A trust is an agreement, usually in writing, where an owner of property (a “settlor,” “grantor,” or “trustor”) makes another person (the “trustee”) the nominal owner of property to be held or used for the benefit of the settlor or one or more others (“beneficiaries”). The settlor can be the trustee of a trust funded during the settlor’s life. If the settlor can amend the provisions of a trust, it is often referred to as a “revocable” trust. If not, it is often referred to as an “irrevocable” trust. Whether a trust should be revocable or irrevocable depends on why the trust is being created, and there are many tax and non-tax considerations that will guide the decision.
After the trust is created, the trustee receives gifts from a donor, who is normally the settlor, but can be others if the trust agreement permits that. The trust agreement includes rules as to what the trustee is supposed to do and how and when.
Trust assets consist of (i) principal, which is the property contributed to the trust or reinvestment of the proceeds of the sale of that property, (ii) income, which includes interest, dividends, rent and royalties from invested principal, and (iii) any gains from the sale of principal assets. The terms of the trust determine who gets distributions of principal, income and gains, and when they get them.
There can be multiple beneficiaries for principal and income. The beneficiaries may be part of a group who may be simultaneously benefitted—for example, to any one or more of the group A, B and C, in the trustee’s discretion or based on standards stated in the trust–or their rights may be sequential—for example, to A for life, then to B for life, remainder to C. Often, trusts divide into multiple trusts for various beneficiaries on the happening of an event, for instance the death of a surviving spouse—for example, to my spouse for life, then divided into two trusts, one for child A and one for child B.
Some reasons people create trusts:
• To manage assets for the benefit of their children if both parents die.
• To avoid probate where privacy or expense of probate is an issue.
• To defer or save estate taxes.
• To minimize taxes on direct transfers to grandchildren.
• To help a family member who has special needs.
• To protect assets from spendthrift heirs.
• To keep the proceeds of life insurance out of the insured’s taxable estate.
• To make a tax deductible charitable gift that allows the settlor to continue to benefit from the assets during life (a charitable remainder trust) or permits the settlor’s family to benefit after the charity has had use of the assets for a stated time (a charitable lead trust).
• To make sure that the settlor’s descendants receive the settlor’s assets if the settlor’s spouse remarries.
• To make sure that the settlor’s assets will be managed for the settlor’s benefit even if the settlor becomes incapacitated.
Settlors often create several trusts because they have multiple objectives.
The rules of trust administration can be complicated, and a trustee has a fiduciary obligation to the beneficiaries to properly manage and invest the trust property and to make appropriate distributions. Individuals who serve as trustees often require the help of professionals to enable them to do their job correctly.
If you are interested in understanding more about trusts and the advantages they can bring to your estate-planning process, or if you need assistance to make sure that a trust is properly administered, please call a member of our Trusts and Estates Department to learn more.