PERSONAL FINANCING: You too can create a trust


Most people have a visceral reaction to the notion of “trust”. Quite often the term conjures up an image of wealthy families supporting a “trust fund baby” or creating complicated financial structures meant to avoid income and estate taxes.

Usually the idea is that a trust is something for the super rich (Rockefeller, Ford, Gates) to benefit charitable causes and possibly future generations. Sometimes, indeed, this can be the case. But very often, however, trusts are an easy to understand legal vehicle that is used to protect one’s assets and to ensure that those assets are properly managed and ultimately distributed to the intended beneficiaries as per the wishes of the person who created the trust. . As someone who has recommended and administered trusts throughout my career, I know that carefully created and properly managed trusts can be valuable vehicles that can benefit individuals across the socioeconomic continuum.

Examples of trusts

A list of the different types and uses of trusts is much longer than space allows here. Let me describe some situations, however, where a trust can help realize the intentions of the person who establishes it (the settlor):

  • A living trust can greatly facilitate the transmission of property in the event of death, reducing or eliminating the tedious and sometimes costly process known as probate. A living trust can also provide for the management of assets by a third party at a point in life, due to age or illness, when one cannot effectively manage one’s own assets;
  • Asset protection trusts, self-explanatory, are particularly useful for people in occupations of high responsibility such as medicine.
  • Conjugal trust (you may have heard the term “QTIP”) is particularly useful when there are children from previous marriages. In the event of death, a matrimonial trust can provide income to the surviving spouse, while ensuring that upon death, the remaining assets are distributed to the children of the settlor;
  • A special needs trust (SNT) can be used to set aside funds for a disabled child, without affecting the child’s ability to receive government assistance;
  • A Medicaid trust can protect assets that would otherwise be depleted by the expenses of an assisted living or nursing home;
  • A spendthrift trust can protect immature or irresponsible children from themselves;
  • And there are many other uses of gifts and estates for trusts that can actually save tax and can respond elegantly to complicated family situations, such as the ages at which children receive their inheritance.

Bases of trust

A trust is a legal entity created by law. Here are some essential elements of creating and operating trusts.

Once created, a trust is governed by its trust document, essentially a blueprint for its operations that defines the purpose of the trust, the different parties to the trust and its operations.

The person who establishes the trust, the “settlor”, can create it during his lifetime (inter vivos trust) or have the trust created on his death by will (testamentary trust). A trust can be revocable (modified by the settlor at any time) or irrevocable (cannot be modified once created). Once a trust is created, it can be currently funded or left unfunded until a later date. For example, a trust may be initially created to hold an insurance policy, which will receive the insurance proceeds upon the death of the settlor.

A trust is created for the benefit of one or more beneficiaries. As the term “beneficiaries” suggests, these are the people (or entities such as, say, charities) who will benefit from the trust’s distributions.

A trust requires one or more “trustees,” the person, person or institution (known as a corporate trustee) that accepts the transfer of assets on behalf of the trust. The trustee is responsible for administering the trust in accordance with the provisions of the trust indenture. The trustee has a fiduciary duty to the beneficiaries of the trust. That is, the trustee must always put the interests of the beneficiaries before his own interests.

That’s a lot to absorb! Establishing a trust always requires the services of an attorney who is experienced in creating and working with trusts. The lawyer will personalize the trust document according to the wishes of the intended outcome of the settlor. The trust documents are quite demanding and its provisions should be carefully followed by the trustee. The lawyer will review the terms of the trust document with the settlor and the trustee so that everyone is on the same page.

Trusts can be extremely elegant financial planning tools that can be useful in providing solutions to many of life’s financial problems. In the next few columns, I’ll discuss specific types of trusts and how they can benefit you and your family.

The author does not provide tax, legal, financial, or investment advice. This material has been prepared for informational purposes only. You should consult your own tax, legal, financial, and investment advisers before committing to any transaction.

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