Trust Basics

What is a trust and 5 powerful estate planning trusts and how they can benefit you and your family.

Trusts are a popular and widely utilized tool by estate planning attorneys in assisting their clients in avoiding estate taxes, avoiding probate, planning for disability and providing financial security for their family.

What is a Trust? A trust is simply an arrangement where one person, the trustor, transfers an asset to another person, the trustee, who controls and manages the asset for the benefit of another, the beneficiary.

Revocable Living Trusts - The most popular trust utilized today is the revocable living trust. As its name implies this trust may be revoked or amended by the trustor at any time for maximum flexibility.

In this type of trust the trustor, trustee and beneficiary are normally the same person. Therefore, while you are alive and not incapacitated you will continue to manage your assets in substantially the same manner as you did before you created the trust. However, in the event of your death or incapacity, the alternative trustee that you have specified will step in and continue to manage your financial affairs without delay and without the need for probate or a costly court appointed conservator to manage your assets.

Other advantages of a living trust include the following:

  • Avoids the publicity, the expenses and the delays of probate.
  • Avoids the interruption of income for family members caused by the death or disability of the trustor.
  • Permits the trustor to see the trust in operation and to make changes as experience and changed circumstances suggest.
  • Less vulnerable than a will to attack by disgruntled beneficiaries.
  • Requires less accounting, administration and court supervision than a trust created by will.
  • Can avoid the requirement of two probates if assets are owned in another state.

Credit Shelter Trusts - A credit shelter trust is the most widely utilized trust to reduce, and many times eliminate, estate taxes for married couples. The credit shelter trust is typically created in a will or in a revocable living trust. Upon the death of a spouse, instead of leaving the surviving spouse the entire estate, all or a portion of the estate is left to the credit shelter trust. This has the effect of removing up to the current federal and/or state estate tax exemption amount from the surviving spouses estate for tax purposes, which can result in tax savings in excess of $700,000.

Typically, the credit shelter trust will then provide income and principal to the surviving spouse during their lifetime. Then upon the survivors death, the credit shelter trust will distribute the remaining trust assets to the beneficiaries specified without having to pay estate taxes.

Family Trusts - Few parents wish for their children (or grandchildren) to receive significant amounts of cash or property at age 18. Unfortunately, without proper planning, this is exactly what happens when children receive an inheritance. If, for example, the child wants to buy a sports car instead of going to college, there is nothing you can do about it.

A will can specify that the child's inheritance be placed in a family trust with the trust income and principal to be used for general support of the child and to pay the child's college expenses. You can also specify that trust assets may be used for other specified purposes such as to purchase a home or start a business. Then, when the child reaches a specified age, 25 for example, the trust is terminated and the child receives the remaining trust assets at a time when the child is more financially capable.

Irrevocable Life Insurance Trusts - Most people do not realize that life insurance proceeds, while not taxable as income by the recipient, are usually taxable in the estate of the insured. This can mean that up to 55% of the life insurance proceeds that you thought would be used to support your family will be paid to the federal treasury.

This can be avoided by creating a trust that will hold the life insurance policy and collect the proceeds upon the insured's death without the payment of estate taxes. The insurance proceeds can then be distributed to a spouse, children or whomever in the manner you deem appropriate.

Charitable Trusts: If you have charitable intentions, a charitable trust may allow you to make a gift to a charity of your choice, receive a tax deduction for the gift and receive income over your lifetime from the trust.

A significant advantage to a charitable trust is that since the trust pays no income taxes, the trust can sell an appreciated asset without tax. This enables the trust to reinvest the full amount of the proceeds and thus generate larger payments to you during your life.

If avoiding estate taxes, avoiding probate, planning for disability or providing financial security for your family is important to you then you should consider implementing one of these five trusts as part of your estate plan. An experienced estate planning attorney can assist you in evaluating and implementing the proper trust to meet your estate planning goals.