Safeguard Your Property With A Trust
Ownership of property provides financial security and freedom. On the other hand, ownership also comes with some burdens. When you own property, all levels of government want to tax and regulate it, creditors want to take it, values can fluctuate unpredictably, and you can lose it if you don’t take care of and protect it.
Wouldn’t it be great if you could have the benefits of ownership without the related risks and headaches? If that is how you feel, you may be interested in learning more about trusts.
How Does A Trust Work?
When you establish a trust, you assign the benefits of property ownership to one or more people (the beneficiaries) and the responsibilities, risks and headaches of ownership to another person (the trustee). In other words, to establish a trust, you transfer ownership of property to a trustee who manages the property for the beneficiaries according to instructions included in the trust document (a trust agreement, declaration of trust or a will). The trustee can be one or more individuals, including you, or a bank or trust company.
What Can A Trust Accomplish?
Trusts have a long history and have been used for centuries for the management and protection of property. The challenges associated with property ownership are not new. For example, during the Crusades of the 12th century, when a landowner/crusader left England to fight, it was not unusual for the crusader to convey ownership of his lands to a person (in essence, a trustee) who would manage the estate in the crusader’s absence. The trustee would receive feudal dues and manage the property on the understanding that ownership would be conveyed back to the crusader on his return.
With the imposition of burdensome income, estate and gift taxes (at one time, up to 70%), creative lawyers and accountants learned how to use trusts to reduce the tax burden. The popular media came to associate trusts with tax planning for the wealthy, but trusts continue to be important for the management and protection of property for both the wealthy and those who are less fortunate.
The terms of a trust will be different depending on the goal you want to achieve. People choose to create trusts to accomplish many different goals, including:
- Avoiding or minimizing estate and income taxes
- Qualifying for government assistance
- Asset protection
- Responsible management (ensuring the distribution of property to your chosen beneficiaries in a manner you believe is most appropriate)
- Avoiding probate
Trusts For Tax Planning
If the goal of a trust is to avoid or reduce taxes, the terms of the trust can be very technical with many references to sections of the Internal Revenue Code, related federal regulations, and state statutes and regulations. In addition, such trusts are almost always irrevocable to some extent and require the person who is attempting to gain a tax advantage to give up certain benefits, influence and control over the trust property.
Trusts are used for tax purposes not only in personal estate planning but also in business tax planning, often when structuring deferred compensation and retirement arrangements and insurance programs.
Trusts used for tax purposes are known by many names and acronyms infused with professional jargon, legalese and bureaucratese. We list some types of trusts below, not so much to enlighten you but rather to assure you that we deal routinely with the arcane instruments that may have come to your attention:
- Estate and gift tax goals: The Credit Shelter Trust; B-Trust; Exemption Trust; Marital Trust; Marital Deduction Trust; QTIP Trust; ILIT (or irrevocable life insurance trust); Generation-Skipping Trust; Dynasty Trust; GRAT; QPRT and IDIT.
- Income tax goals: The IDIT (Intentionally Defective Irrevocable Trust); the NING Trust (Nevada Incomplete Gift Non-Grantor Trust); the DING Trust (Delaware Incomplete Gift Non-Grantor Trust); the WING Trust (Wyoming Incomplete Gift Non-Grantor Trust); and other INGs (Incomplete Gift Non-Grantor Trusts in other jurisdictions that are trying to attract such trusts).
- Tax goals through charitable giving: The Charitable Remainder Annuity Trust (CRAT); Charitable Remainder Unitrust (CRUT); Charitable Lead Annuity Trust (CLAT); and the charitable foundation that may be in a trust or corporate form.
Whew! That was more than a mouthful of alphabet soup, but we can “feed” you explanations of any that may be of interest.
Trusts And Government Assistance, Including Special Needs Trusts
The terms of trusts designed to allow the beneficiaries to qualify for government assistance are highly technical with an emphasis on state rules and regulations and the practices of local regulators. Because a beneficiary’s right to receive any benefit from a trust might disqualify the beneficiary from receiving government assistance, the terms of the trust must carefully restrict the beneficiary’s rights to receive trust property. Usually, however, the trustee is granted broad discretion to use trust property for the beneficiary but only in a way that will not adversely affect government assistance.
Asset Protection Trusts
When asset protection is the goal, the focus usually is on protecting the trust property from the claims of the creditors of the beneficiary of the trust. Usually, the strength of the protection from creditors’ claims depends on whether the beneficiary has a right to receive benefits from the trust that the creditor may attach by the legal process.
Until recently, the laws of a large majority of states allowed creditors to reach the property of a trust that was created by the debtor, if the debtor retained any possibility of receiving benefits from the property of the trust. More recently, many state legislatures have passed statutes that offer greater protection of certain trusts from creditors’ claims. Some of the more debtor-friendly asset protection trust states are Nevada, South Dakota, Tennessee and Ohio. On the east coast of the U.S., the more debtor-friendly asset protection trust states are Delaware, Rhode Island and New Hampshire.
Trusts For Responsible Management Of Property
If the trust is to provide management of property for beneficiaries who are not interested in or capable of management, the terms of a trust may be highly customized to deal with the unique characteristics of the property and beneficiaries. Such trusts may be revocable or irrevocable, technical or relatively simple, created while you are alive (through living trusts) or at the time of your death (through your will as a testamentary trust).
Often they are prepared with tax advantages in mind, and, in that case, they can be highly technical. Such trusts can be prepared with the special needs of beneficiaries in mind and, therefore, may include terms related to government assistance, medical care, home care, nursing homes and other personal needs of the beneficiary.
Or, perhaps a special asset requires special management. A trust that will hold firearms will be quite different from a trust that will hold primarily real estate or interests in a closely held business, and a person who is an appropriate trustee for a real estate trust may not be appropriate as a trustee for a firearms trust.
Probate is a court proceeding to determine that a document that purports to express the decedent’s final wishes is actually their last will and testament. As part of the proceeding, the court will appoint an executor (the person who is responsible for carrying out the terms of the will).
In some states, the court will closely supervise the performance of the executor as the executor performs the duties involved in settling the estate. In other states, court supervision is less intrusive.
Court involvement will always result in some delay, publicity and costs, but it also serves to reduce fraud and misappropriation. In some states, the delay is minor, and in other states delay is a bigger problem. Much of the delay and cost can be avoided by using a trust to avoid probate.
In some cases, avoiding probate also means avoiding the costs of lawyers and court proceedings. That can be true, but the process of settling the affairs of a decedent, whether in a probate setting or outside of probate, can be tricky. If the executor or trustee makes mistakes, he or she may become personally liable to the beneficiaries. Whether or not probate is avoided, a smart executor or trustee will consult with an experienced estate settlement attorney early in the process to learn about all the required estate settlement steps, to identify special problems and to discuss how to deal with them.