Trusts
A trust has many benefits
to individuals, below is a highlight of how trusts could work for you.
At Reliance Financial Services, N.A. this is our specialty, if you
have questions, please contact us at 1-800-273-5820 or
419-783-8007.
Why
use a trust?
There are many different reasons why you may want to
use a trust. For example, you may want
to: avoid probate, have professional management of your assets, provide
for your minor children, avoid estate taxes, and protect your assets
from creditors.
What is a trust
A trust is a legal entity that is created when you transfer property to
a trustee for the benefit of a third person. The trustee manages the
property for the beneficiary in accordance with the terms and the
instructions in the trust document. In
legal terms, the trustee has legal ownership of the property, while the
beneficiary has beneficial ownership.
Creator of
trust
The person who creates the trust
is called the grantor, settlor, donor, or trustor. The grantor usually
decides what assets will be transferred to the trust,
who the beneficiaries will be, what the terms and conditions of the trust
will be, and who will be the trustee. The grantor may also be a trustee
and/or a beneficiary. Moreover, a beneficiary can be a trustee. The only
arrangement that will not work is if the sole trustee is also the sole
beneficiary (the legal and beneficial interests are said to merge and
the trust is therefore disregarded as
a legal entity).
Trust document
To create a trust,
you usually have to have a written document (called a deed or agreement)
that provides the terms of the trust.
In most cases, an attorney should draft the trust
document. Among other things, the trust
document names a trustee, directs the trustee about how to manage and
invest the assets in the trust, names
the beneficiaries of the trust, and
instructs the trustee regarding when to pay out income and principal to
the beneficiaries. The trust document
may give explicit and detailed instructions about these duties.
Alternatively, the trust document may
give only very broad and simple guidance. Furthermore, the trust
document may give instructions for the distribution of principal which
differ from instructions for the distribution of the income generated by
the trust. For example, it is very
common that a trust document will
instruct the trustee to distribute the income to one or more
beneficiaries and then pay out the principal to completely different
beneficiaries at some point in the future.
Trustee
The grantor selects the trustee. The trustee can be an
individual or a corporate trustee (such as a bank trust
department). Some trusts may have both a corporate trustee and an
individual trustee. The trustee assumes responsibility for the
management and distribution of the assets in the trust.
The trustee's duties include making numerous complex legal, investment,
and fiduciary decisions. Therefore, the selection of trustee should not
be taken lightly. There are many factors that should be considered
before selecting a trustee, such as the size of the trust,
the purpose of the trust, the duration
of the trust, the location of
beneficiaries, and the tax ramifications.
In certain situations, the grantor can name
himself or herself as trustee. A family member can be appointed as
trustee, as can a friend, the attorney who drafts the trust,
or your accountant. Finally, a corporate trustee, such as a bank trust
department or an independent trust
company can be named. You should probably discuss all of these options
with an attorney.
Trust assets
Another decision you will face in setting up a trust
is: Which assets should you transfer to the trust?
The type of asset that you may transfer to a trust
is almost limitless. You can transfer cash, stocks, bonds, insurance
policies, real estate, your personal residence, artwork, and almost any
other type of asset. The type of asset that you might transfer to a trust
depends on what assets you currently own and what your goals are. For
example, if you want to provide the beneficiaries with income, you may
want to transfer bonds or high-yield stocks. If your goal is to provide
the beneficiaries with liquidity to pay estate taxes, you may want to
transfer a life insurance policy.
Types of trusts
There are several different types of trusts that you
can create. You can create a trust in
your will (this is called a testamentary trust),
or you can create a trust during your
life (this is called a living trust).
You can create a revocable trust (this
kind of trust you can amend or
revoke), or an irrevocable trust (this
kind of trust you cannot amend or
revoke).
Testamentary
trust
A testamentary trust
is one that is created and funded under the terms of your will. It does
not come into existence until your death. Assets that are transferred to
the trust must pass through probate.
Until your death, you can change the terms of
the trust by amending your will. Upon
your death, the trust becomes
irrevocable.
A testamentary trust
can be contingent. That means that it will be created upon your death
only if certain conditions are present (e.g., your children are under a
certain age).
Living trust
A living trust, also
called an inter vivos trust, is
created while you are living. A living trust
can either end or continue at your death. Property in the trust
is distributed according to the terms of the trust,
not your will. Living trust assets
avoid probate.
Revocable
trust
As the name implies, you can revoke or amend the terms
of a revocable trust. You can change
the beneficiaries or trustee. You can add or remove assets from the trust.
You can also change the provisions of the trust.
You can even dissolve the trust.
Furthermore, at your death, the assets in the revocable trust
do not pass by the terms your will (and thus do not pass through
probate). Instead, the assets in a revocable trust
are distributed in accordance with the terms of the trust.
In fact, many people set up a revocable living trust
simply to avoid the delay and cost of probate.
Irrevocable trust
Again, as the name implies, an irrevocable trust
is one that you cannot revoke or amend once the trust
has been established. This means that you cannot dissolve the trust,
change the beneficiaries, remove assets from the trust,
or change the terms of the trust. The
main advantage to setting up an irrevocable trust
is that the assets in the trust,
including any future appreciation, are not included in your gross estate
for estate tax purposes. Of course, the transfer to an irrevocable trust
may be a taxable gift, and gift taxes may have to be paid at the time of
the transfer. A secondary benefit of an irrevocable trust
may be that the assets in the trust
are beyond the reach of your creditors.
Irrevocable trusts are used primarily as estate
planning tools. With careful planning, you may be able to save
substantial amounts in estate taxes. There are many different types of
irrevocable trusts that can be set up. To name a few, there is an
irrevocable life insurance trust (to
hold an insurance policy), a qualified personal residence trust
(to hold a personal residence), and a grantor retained annuity trust
(to provide you with income).
Is a trust right for you?
We are happy to help you decide if a trust should be a part
of your successful financial future, just contact us we will help you
work through the decision, 1-800-273-5820 or
419-783-8007.
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