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Trusts & Estates

Trust Basics

Introduction to trusts

Trusts are designed to help you protect your wealth today and maximize your legacy for future generations. Each trust is unique, but there are some common elements and structures that you should understand.

What’s a trust?

A trust is a fiduciary1 relationship in which one party (the Grantor) gives a second party2 (the Trustee) the right to hold title to property or assets for the benefit of a third party (the beneficiary).

First, the grantor works with an attorney, who writes the trust document, based on their wishes for the assets or property.

Second, the grantor chooses a responsible trustee (person or firm) to hold and administer assets or property for the benefit the beneficiary.

Next, the trustee explains the terms and conditions of the trust to the beneficiary.

Main types of trusts:

Trusts may fall into a variety of categories based upon their structure, the type of beneficiaries, and how long they will last. However, all trusts fall into two broad categories —revocable and irrevocable:

Revocable Trust

  • Called a revocable living trust
  • Created by the grantor during his or her lifetime
  • Primarily used for
    • Incapacity planning purposes
    • To avoid probate at the grantor’s death, (reducing court costs and providing privacy)
  • Do not have creditor protection or tax savings benefits
  • The grantor:
    • May change the trust at any time
    • May terminate the trust
    • Has free access to the assets

Irrevocable Trust

  • Usually created by the grantor to benefit others (E.g. children/grandchildren)
  • Primarily used:
    • To hold lifetime gifts for the beneficiaries
    • To receive assets following the grantor’s death
  • Tax planning and asset protection are two reasons these trusts may stay in place for multiple generations
  • The grantor:
    • May have some control through the terms established in the trust document
    • Generally cannot change the trust in any meaningful way.

 

Who is in charge of the trust?

  • Once the grantor has transferred assets to the trust, the trustee is in charge of administering and operating the trust
  • The trustee is responsible for:
    • Following all directions in the trust document
    • The investment and protection of the assets in the trust
    • Tax return filings
    • Reporting to the beneficiaries
    • Making income and principal distributions as permitted by the trust
  • The trustee must be impartial and independent in dealings with the beneficiaries
  • The trustee may be one or more individuals or corporations
  • Sometimes the individuals and the corporation serve together as co-trustees, or a firm can serve as Agent for Trustee

 

Are all beneficiaries the same?

  • Each trust will have one or more individual or charitable beneficiaries.
  • There are two broad categories of beneficiaries - current and remainder.
    • Current: May receive distributions during the term of the trust
    • Remainder: Will receive what’s left in the trust when it terminates
  • For current beneficiaries:
    • The trust document will explain under what conditions distributions may be made to these beneficiaries.
    • Sometimes the trustee has broad discretion to determine when and how much to distribute.
  • For remainder beneficiaries:
    • Some trusts will terminate at a specific time, such as when the beneficiary reaches a certain age.
    • When the trust ends, the balance of the trust assets passes to the remainder beneficiaries.

 

I’m a trust beneficiary. What does that mean?

You are most likely the beneficiary of an irrevocable trust. The trust was likely created by another family member with the intent of providing you with financial resources and security. What do you really know about your trust?

Here's what you can do:

Meet with the trustee and review the general terms of the trust so that you understand your benefits under the trust.

Questions to ask:

  • Does the trust require that income be distributed to you periodically?
  • Can you request additional distributions from the trust?
  • Can the trust be used to help you buy a home, start a business or fund an education?
  • Does the trust terminate at a particular time? If so, who receives the principal remaining in the trust account?

Learn how the trust is invested. Distributions of trust income are made up of interest, dividends, rents, royalties, etc. This type of income may be taxable to you, and you need to consider it when planning your withholding or estimated tax payments.

Questions to ask:

  • Are the payments you receive taxable to you?
  • What is the investment objective for the trust portfolio?
  • What investment assets are held in the trust and how/why were these particular investments selected?

Determine if you have any control over the ultimate distribution of this trust (also known as “power of appointment”) either during your lifetime or through your estate.

Questions to ask:

  • What does it mean to have power of appointment?
  • Can the power of appointment be limited in its scope?
  • Do you have any control over the ultimate distribution of this trust?

Find out if you will become, or if you have the opportunity to become, a co-trustee or the sole trustee of your own trust (E.g. manage it with someone else or on your own).

Questions to ask:

  • If you will become a trustee, what duties will you have and how should you prepare yourself for that role?
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