04 Oct 2012
- Written by Carlee McCullough
If you think trusts are only for rich people, think again.
Generally speaking, a trust is simply an arrangement whereby one person agrees to hold property for the benefit of another. So, a trust is made to order if you are looking to reduce your assets/income or estate tax liabilities, avoid probate, or issue money to your beneficiaries in increments – instead of lump sums – in the event of your death.
Step one is to understand the terminology used in the trust agreement, which is the governing document that lays out the rules that you want executed for the property held in trust for your beneficiaries.
The trustor – also commonly known as the settlor or grantor – is typically the person establishing the trust and the one with the assets. The beneficiary is the one that benefits from the trust. The trustee is the person, bank, attorney or corporation in charge of the trust. A good way to remember the trustee's role is to remember that the trustor places all of his trust in the trustee to act at all times in the best interest of the beneficiaries. This person has to be knowledgeable of rules and desires of the trustor since they are responsible for the management of the trust. Trust property is what the trustor places in the trust.
Trust Property, also known as corpus or res, can include cash from bank accounts or insurance policies, stock, real estate, and/or any other property that the trustor wishes to place in the trust. Once property has been placed in the trust, it no longer belongs to the trustor. This means that the trustor no longer pays income tax on the money made from the assets and is safe from bankruptcy, creditors, divorce, and tax liabilities depending on the timing of the creation of the trust.
There are different types of trusts depending upon the objective and purpose of the trust.
A revocable trust is an instrument that allows the trustor the opportunity to change his or her mind and make changes to the trust or cancel it all together after it has been created.
An irrevocable trust locks the trustor in and does not allow for changes or the cancellation of the trust unless special circumstances present themselves.
A living trust is an instrument that is set up during the trustor's life. This is different from a living will, which provides instruction regarding life support in the event of certain death. The trust document names the trust, the trustee and one or more successor trustees, directs the administration of the trust for the life of the trust and the disposition of the assets and income upon the termination of the trust. If done properly, this trust can help to avoid probate.
A trust that is included in a will and takes effect upon death is called a testamentary trust. It is revocable prior to death simply by adjusting the will. But upon death it becomes irrevocable because the person that could have revoked it is dead. This one is not as advantageous and does not necessarily avoid probate. Because probate is not avoided, it is not as private as the living trust.
A kiss trust is a low-cost savings plan for kids that can only be used for the intended purpose or distributed at the age you specify. This trust can be used for a wide variety of purposes, including educational or home purchases. This is a favorite amongst those with a little money to share because the cost to establish is relatively low.
The types of trusts based on purposes are varied and quite long. The list includes A/B trusts, asset protection trusts or credit shelter trust, by-pass trusts, various types of charitable trusts, Crummey trusts, dynasty trusts, generation skipping trusts, grantor trusts, life insurance trusts, grantor retained income trusts, qualified personal residence trusts, resulting trusts, special needs trusts, spendthrift trusts, and Totten trusts.
There is a trust to fit most any need that a person wishing to plan may have. Under no circumstances should you attempt to create a trust on your own. The worst outcome possible is that you create a document that is later found to be invalid and your wishes are not carried out. Reach out to an attorney and seek advice. Ultimately, you either pay now or pay later.