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Our Legal Teams in Danbury, Southbury, and Westport Know How to Use Trusts to Protect Your Assets

Ownership of property provides financial security and freedom. On the other hand, it can present financial burdens. When you own property, governments 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 personal assets. 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 that person to convey ownership of his lands to a person (in essence, a trustee) who would manage the estate in his absence. The trustee would receive feudal dues and care for the property with 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. Media tends to associate trusts with tax planning for the wealthy, but trusts continue to be important for the management and protection of property for middle-class individuals as well as the rich.

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 or simplifying the probate process

Trusts for Tax Planning

If the goal of a trust is to avoid or reduce taxes, the terms of the trust must be very technical with 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 cede 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, retirement arrangements and insurance programs.

Trusts used for tax purposes are known by many names and acronyms infused with professional jargon, legalese and bureaucratese. Here are some of the many types of trust available to you. We have made this list 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); NING Trust (Nevada Incomplete Gift Non-Grantor Trust); DING Trust (Delaware Incomplete Gift Non-Grantor Trust); 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.

What Type of Trust Is Best for Me?

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 ability to receive any assets from a trust might disqualify that person from receiving government assistance, the terms of the trust must carefully restrict the beneficiary’s rights. 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 creditors’ claims. Usually, the strength of the protection 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 in 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. Connecticut adopted its version of legislation related to asset protection trusts effective January 1, 2020.

Trusts for Responsible Management Of Property

If the trust is to provide management of property for beneficiaries who are either disinterested in or incapable 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, these trusts are prepared with tax advantages in mind; in this 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 holds firearms will be quite different from a trust that holds primarily real estate or interests in a closely held business, and a person who is an appropriate trustee for one type of trust may not be a good fit for another.

Trusts to Simplify Probate

Probate is a court proceeding to determine that a document that purports to express the decedent’s final wishes is actually the decedent’s last will and testament. As part of the proceeding, the court will appoint an executor: someone 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 he or she perform 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; in other states, it is a bigger problem. Much of the delay and cost can be avoided by creating a trust rather than a last will and testament.

In some cases, avoiding probate also means sidestepping court and legal fees. However, the process of settling the affairs of a decedent, whether in a probate setting or not, can be tricky. If the executor or trustee makes mistakes, he or she may become personally liable to the beneficiaries. Regardless of whether probate is on the table, 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, identify special problems and discuss potential solutions.

Learn Whether A Trust Is Right for You

We can help you protect your loved ones and your most important assets by creating a trust. However, there are many details you need to know—and important decisions to make. Our lawyers will be here by your side. With our experience and personal touch, we offer high-quality service to Connecticut and New York families.

To determine whether a trust is right for you, reach out to one of our Danbury, Southbury, and Westport Connecticut offices today. We can explain your options and advise you on the potential benefits and drawbacks of each.

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