March 17, 2014

Trusts. Lots of varieties, and lots of mystery. Here’s some basic information.

Trusts exist for many reasons, most of them bound up in estate planning. Trusts vary in terms of their purposes and terms, but they all have about them a core concept:  they are tri-party agreements that involve fiduciary duties.

A tri-party agreement involves three parties. A trust always has at least one settler/trust, at least one trustee, and at least one beneficiary. The settlor—trustor is a synonymous term here—creates a trust by depositing now, or promising to deposit sometime in the future, often at death—money or other assets. The settlor is also almost always the person who has the trust agreement drafted.

Every trust has at least one trustee, but a trust may have co-trustees. The trustee can be a person or a business entity, and many trustees are banks or Licensed Fiduciaries. The trustee has as his, her, or its job fulfilling the directives set forth in the trust. So, if the trust says “distribute money” the trustee must distribute money, and if the trust says “don’t pay beneficiaries’ creditors” the trustee cannot pay those creditors.

Beneficiaries are the people who benefit from the trust. They are a defined set of people, although they may or may not be alive when the trust gets drafted, and they may be individuals or entities (often charitable institutions). Distributions may be conditioned on a certain event—reaching a certain age, graduating from college, or getting married—or on a non-event, such as “no money if you’re not living according to principles set forth by the settlor.”

Trusts may be revocable or irrevocable. A living trust is usually revocable, which means it can be terminated so long as the settlor is alive. An irrevocable trust cannot be terminated. Taxes often drive decisions about revocable v. irrevocable, although the most common trust I see/draft involves a married couple, is revocable until the first spouse dies, and will not involve any estate tax issues unless the couple’s estates exceed a combined value of $10,680,000. (I’m slightly oversimplifying here, but I also note the fact that in most cases estate values are lower than fair market value for several reasons. In short, though, estate taxes only affect rich people.)

Trusts may be inter vivos or testamentary. Revocable and irrevocable trusts are inter vivos trusts, while you will see a testamentary trust created in a will. Testamentary trusts appear often in wills for couples with younger children, as the parents, should they both die, want to be sure their assets are handled for their children until they are old enough to handle the money.

Charitable trusts are a world unto themselves. They provide vehicles, often, for maximizing charitable deductions and keeping value until a later date, in return for making an irrevocable gift to a charitable institution.

Two more quick points:  In a trust the settlors, trustees, and initial beneficiaries can be the same people, so long as someday—usually at death—someone else will step into the trustee or beneficiary role. And, all of the trustee’s duties may be reviewed by a court, although courts do not generally supervise trusts unless a problem arises.

Lots more to know about trusts, coming in future posts.


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