03/09/2011

What is a Trust and What Can It do For Me?

The IRS has a simple definition of a trust: “In general, a trust is a relationship in which one person holds title to property, subject to an obligation to keep or use the property for the benefit of another.”

Tackling the legal terms involved in trusts: the person who establishes a trust is called the Grantor, Settlor or Trust Maker.  The person for whom the Trust is created and who will reap the benefits of the trust is called the Beneficiary.  The person who holds title to trust property and manages it for the benefit of the Beneficiary is called the Trustee. 

There are a variety of commonly used trusts, and they can be broken down into two broad categories – revocable and irrevocable.  In the case of revocable trusts, the Grantor retains the right to make changes or eliminate the trust entirely during his lifetime.  They are frequently referred to as Inter Vivos (during life) or Living trusts.  Irrevocable trusts are permanent and unalterable, and are generally created to produce particular tax results such as shifting assets out of the Grantor’s taxable estate.

Revocable Living Trusts are commonly used planning mechanisms.  There can be individual trusts for single or married people, or a married couple may opt for a joint or family trust.  Some of the common reasons for utilizing a revocable trust are

  • minimize passing the decedent’s estate through probate
  • control the distribution of one’s estate with maximum privacy
  • ensure the desired distribution within a blended family
  • for a married couple, take maximum advantage of the federal estate tax exemption, and 
  • for a same-sex couple living in a state that does not recognize same-sex marriage, such as Virginia, ensure that each party’s estate passes to the surviving partner.

A Retirement Plan Trust is another revocable trust that entails planning with retirement assets.  With “defined contribution” retirement plans overwhelmingly favored by employers, many families have accumulated substantial retirement accounts in annuities, IRAs and 401(k) that rely on beneficiary designations.  When parents name their minor children as beneficiaries, they should understand that insurance companies and IRA/401(k) custodians cannot pay benefits directly to minor children, and will require that a legal representative be named to receive benefits on behalf of the children.  This brings the court system into an essentially family matter with court-appointed guardians named to protect the rights of the minors, possibly at unplanned expense and delay in receiving benefits.  It may be more effective to plan in advance to create a Retirement Plan Trust to receive the retirement assets, and to name preferred family members or friends as trustees to manage benefits for minor children.   

If a potential beneficiary of one’s estate is handicapped, disabled or otherwise eligible for government benefit such as Social Security Disability Insurance or Medicaid, receipt of an inheritance can jeopardize or eliminate eligibility for the government programs.   A parent can create a Supplemental Needs or Special Needs Trust to receive and manage assets for the disabled beneficiary.  The parent must inform anyone who might leave part of his estate to the disabled beneficiary that the trust has been created, and that assets should be left to the trust, not the beneficiary in person.  Many people receive government benefits based on formal diagnoses of serious medical or psychological conditions.

Leona Helmsley made “pet trusts” famous when she left $12 million to her pets.  Pet Trusts do serve a purpose for animals that do not have a natural successor caretaker.  They allow the owner designate a person to care for the pets, name a trustee to manage assets to cover the cost of food, veterinarian care, grooming and even for assisted living for the pets should the designated person not be able to care for the pets.  Virginia has a Pet Trust law.

There are a number of irrevocable trusts such as Life Insurance Trusts, Intentionally Defective Grantor Trusts and Grantor Retained Annuity Trusts that entail sophisticated planning to minimize estate taxes by moving assets out of someone’s estate during life.  Charitable planning can also involve trusts.  Conservation Easements involve another form of trust planning, by creating permanent restrictions on what use can be made of rural land. 

 

 


Law Office of Eileen Guerin Swicker

20 W. Market St. Suite E, Leesburg, VA 20176 Tel: 571-918-0616  Fax: 703-459-9620