What is a Trust?

What is a Trust? by Tom Sciacca

{Read in 6 minutes} A lot of people talk about Trusts these days. You may hear about them on the radio or see financial experts talking about them on television. Sometimes clients come in and advise me that they want me to write a Trust for them. But when I inquire as to why someone sitting across the table from me would like a Trust, I find that few people know very much about them. In this post I will address the following questions: What is a Trust? What are some of the different types of Trusts? What are some of the advantages and disadvantages of Trusts?

When someone creates a Trust, they create a new legal entity. This entity can own assets, conduct business, receive income and pay expenses—almost everything that we individually can do as people. A Trust may have to apply for its own taxpayer identification number from the IRS, and may need to file its own annual income tax returns. A Trustee (or multiple Trustees) manage the assets of the Trust and are responsible for conducting themselves in accordance with the wishes of the person who created the Trust, who is called the Grantor. The Grantor can specify the duration of the Trust. For example, it may provide a benefit for a certain term of years while the beneficiary is a minor, or for the lifetime of a specific beneficiary, or for generations of the Grantor’s descendants.

Trusts Created During Lifetime

Lifetime Trusts, or inter-vivos Trusts, are Trusts that the Grantor creates and funds during their lifetime.

The Grantor creates the Trust by drawing up a document called a Trust Agreement. Usually the Grantor will work with an attorney to do this, however, there are several pre-packaged Trust Agreement forms commercially available online. Both the Grantor and the Trustees need to sign the Trust Agreement. Then the Grantor funds the Trust by moving one or more of their assets into the name of the Trust. For example, the Grantor might retitle a bank account in the name of the Trust, or might assign their tangible personal property to the Trust, or might record a Deed to real property or a condominium into the Trust.

There are some very common types of inter-vivos Trusts. The most common is something called a Revocable Trust or a Living Trust. A Revocable Trust is a very common tool that the Grantor may use to avoid probate.

Most commonly, the Grantor serves as the Trustee of this Trust. The Grantor can manage the Trust assets in any way that they wish and treat the assets as their own so long as they are living and competent to do so. They do not need permission from anyone else to withdraw funds. The Grantor would likely name a Successor Trustee or the Grantor would likely name one or more successor Trustees. These might be adult children, friends, other family members, or professionals such as attorneys or accountants. The Successor Trustee would handle the administration of the Trust after the Grantor dies and distribute the remaining proceeds out to those beneficiaries that the Grantor has designated.

If the Grantor becomes unable to manage their own financial affairs during their lifetime, the Successor Trustee may step up to the plate and help manage the assets of the Trust, without ever having to deal with a Power of Attorney.

There are many other types of inter-vivos Trusts. While they are too numerous to list in their entirety, here are some examples:

Supplemental Needs Trust (a Trust for a disabled beneficiary receiving government entitlements)

-Irrevocable Medicaid Trust (to secure assets against long-term care costs)

-Estate Tax Planning Trust (various types of irrevocable tax-planning Trusts that may reduce estate tax liability upon death)

Testamentary Trusts

In general, the word “testamentary” refers to an asset that transfers upon death. By definition, a Testamentary Trust is a Trust that a client would create in their Last Will and Testament. Unlike the inter-vivos Trusts I discussed above, there are no requirements to draft a Trust Agreement during a client’s lifetime, and the client need not transfer any of their assets into the Trust during their lifetime. Instead, the language in the client’s Will serves as the Trust Agreement and the Will nominates the Trustee. When the Court probates the Will, and the Court authorizes and creates a Trust and appoints the Trustees selected in the Will. The Executor funds the Trust by transferring assets to the Trustee that the client specifies in the Will.

A Testamentary Trust has no legal significance during the client’s lifetime. Therefore, the client cannot serve as the Trustee of their own Trust. Again, they have a broad array of available people who can serve, including adult children, siblings, close friends, or professionals.

What are some common examples of Testamentary Trusts? Here are some that I routinely draft for clients:

-Minor’s Trust (Client would create this in the Will for the benefit of minors to delay distribution until a certain age of a client’s choosing)

-Marital Trusts (Clients create this Trust to provide for a surviving spouse, while ensuring that upon the death of the surviving spouse other beneficiaries such as children from a previous marriage will inherit the assets)

-Credit Shelter Trusts (One of several estate tax-planning Trusts that a client may create in their Will to reduce taxes)

-Supplemental Needs Trusts (Just as above, however the client may choose not to create the Trust until the client’s death, directing the Executor to fund the Trust with estate assets)

This article is meant as a brief overview of Trusts. I mentioned several different types of Trusts above, but this is by no means an exhaustive list. Very often, there are avenues available other than Trusts, which can potentially save some hassle and income tax return filing requirements.

Clients interested in forming a Trust should discuss the matter with an attorney.  

Thomas Sciacca

 

Thomas Sciacca

www.sciaccalaw.com
Tom@SciaccaLaw.com
(212) 495-0317