What You Need to Know
About Trusts
Many people do not realize
that there are several different kinds of trusts
that can be established. Here are a few of them:
Testamentary Trusts
The most common trust established in wills is
to hold assets for minor children. In this type
of trust the assets are held and paid out as
needed for the care of the child or children.
The trust will terminate at some point in the
future when a specified event occurs, usually a
child reaching a certain age.
Another common trust is a marital deduction
trust used as a tax savings tool in larger
estates. If this type of trust is to be part of
your will you need to make certain you
understand the reason for the trust. The
Internal Revenue Code is complicated and the
language of these trusts can be very confusing.
The attorney must understand the tax law and its
impact on your estate. Tax savings may be a
secondary issue in your estate plan.
In some cases a special needs trust may be
created to protect a handicapped child or other
beneficiary. These trusts require careful
planning to avoid the potential of causing the
beneficiary to lose rights to government
programs. Careful consideration must be given to
both State and Federal law and regulations. An
attorney who handles this type of trust must be
well versed in the regulations governing
entitlements to those with special needs.
A trust can also be used to control a
beneficiary's access to assets where waste is a
concern. Also, trusts can extend far into the
future, well beyond the life of the initial
beneficiary.
Irrevocable Trusts
Trusts which are irrevocable are most
commonly used to plan for tax savings or to
control access to assets for a spouse or
children over a long period of time. The trust
instrument generally permits the trustee to
exercise broad discretion in managing the
assets.
The settlor (creator) of an irrevocable trust
transfers assets to the trust. Sometimes life
insurance policies are part of the trust corpus.
Once conveyed to the trust the settlor is
generally required to give up any interest or
control over the asset. the trust becomes its
own individual with its own taxpayer
identification number.
Revocable or Living Trusts
This type of trust differs from an
irrevocable trust in that the settlor can change
their mind and terminate the trust. They can
also be effective tax planning tools but the tax
advantages do not generally come into play until
after the death of the settlor.
Living trusts have been highly publicized in
recent months. National magazines carry ads
about them, attorneys hold seminars encouraging
people to have a living trust rather than a
will. There are several advantages claimed for a
living trust:
- Avoid probate and
probate costs.
- No requirement for
a judge to approve your estate plan.
- No delay in court
time for the probate process.
- Wills are recorded
and become public records. Anyone can look at
what you have.
Although these documents have their place,
and there are some valid reasons to consider a
living trust, they may be several times more
expensive than a will. For the majority of
average folk, a living trust is not the
preferred estate planning tool. Remember, when
someone is pitching something, they usually
stand to gain financially. do your homework
before proceeding.
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