Estate Planning, Trusts

Common usages of trusts include:

1. Privacy. Trusts may be created purely for privacy. The terms of a will are public and the terms of a trust are not.
2. Spendthrift Protection. Trusts may be used to protect beneficiaries (for example, one's children) against their own inability to handle money.
3. Children. Trusts frequently appear in wills. A fairly conventional will, even for a comparatively poor person, often leaves assets to the deceased's spouse (if any), and then to the children equally. If the children are under 18, or under some other age mentioned in the will (21 and 25 are common), a trust must come into existence until the contingency age is reached. The executor of the will is (usually) the trustee, and the children are the beneficiaries. The trustee will have powers to assist the beneficiaries during their minority.
4. Remuneration Trusts. Trusts for the benefit of directors and employees or companies or their families or dependents.
5. Asset Protection. The principle of "asset protection" is for a person to separate himself or herself personally from the assets he or she would otherwise own, with the intention that future creditors will not be able to attack that money, even though they may be able to bankrupt him or her personally. One method of asset protection is the creation of a discretionary trust, of which the settlor may be the protector and a beneficiary, but not the trustee and not the sole beneficiary. In such an arrangement the settlor may be in a position to benefit from the trust assets, without owning them, and therefore without them being available to his creditors.
6. Tax Planning. The tax consequences of doing anything using a trust are usually different from the tax consequences of achieving the same effect by another route. In many cases the tax consequences of using the trust are better than the alternative, and trusts are therefore frequently used for legal tax avoidance.
7. Co-ownership. Ownership of property by more than one person is facilitated by a trust. In particular, ownership of a matrimonial home is commonly effected by a trust with both partners as beneficiaries and one, or both, owning the legal title as trustee.

Trusts Types

Dynasty trust also known as a Generation-skipping trust. In this type of trust, assets are passed down to the grantor's grandchildren, not the grantor's children. The children of the grantor never take title to the assets. This allows the grantor to avoid the estate taxes that would apply if the assets were transferred to his or her children first. Generation-skipping trusts can still be used to provide financial benefits to a grantor's children, however, because any income generated by the trust's assets can be made accessible to the grantor's children while still leaving the assets in trust for the grandchildren.

Fixed trust. In a fixed trust, the entitlement of the beneficiaries is fixed by the settlor. The trustee has little or no discretion. Common examples are:

• a trust for a minor ("to x if she attains 21");
• a life interest ("to pay the income to x for her lifetime"); and
• a remainder ("to pay the capital to y after the death of x")

Incentive trust. A trust that uses distributions from income or principal as an incentive to encourage or discourage certain behaviors on the part of the beneficiary. The term "incentive trust" is sometimes used to distinguish trusts that provide fixed conditions for access to trust funds from discretionary trusts that leave such decisions up to the trustee.

Irrevocable trust. In contrast to a revocable trust, an irrevocable trust is one in which the terms of the trust cannot be amended or revised until the terms or purposes of the trust have been completed.

Protective trust. Often a person, A, wishes to leave property to another person B.  A however fears that the property might be claimed by creditors before A dies, and that therefore B would receive none of it. A could establish a trust with B as the beneficiary, but then A would not be entitled to use of the property before they died. Protective trusts were developed as a solution to this situation. A would establish a trust with both A and B as beneficiaries, with the trustee instructed to allow A use of the property until they died, and thereafter to allow its use to B. The property is then safe from being claimed by A's creditors, at least so long as the debt was entered into after the trust's establishment. This use of trusts is similar to life estates and remainders, and are frequently used as alternatives to them.

Revocable trust. A trust of this kind may be amended, altered or revoked by its settlor at any time, provided the settlor is not mentally incapacitated.  Revocable trusts are becoming increasingly common as a substitute for a will to minimize administrative costs associated with probate and to provide centralized administration of a person's final affairs after death.

A Spendthrift trust is a trust put into place for the benefit of a person who is unable to control their spending. It gives the trustee the power to decide how the trust funds may be spent for the benefit of the beneficiary.

Unit trust. A unit trust is a trust where the beneficiaries (called unitholders) each possess a certain share (called units) and can direct the trustee to pay money to them out of the trust property according to the number of units they possess. A unit trust is a vehicle for collective investment, rather than disposition, as the person who gives the property to the trustee is also the beneficiary.

We understand trusts and how they can be effectively used.  Give us a call to see how trusts might benefit you.

This information is not intended to be a substitute for specific individualized tax or legal advice.  We suggest that you discuss your specific situation with a qualified tax or legal advisor.