Trusts and Living Trusts
A trust is where property is managed by someone on behalf of someone else. The person who owns the property (settlor or grantor) sets up the management of property with a person or group of people (trustee) on behalf of a spouse, child, or someone else (beneficiary).
There are several kinds of trusts covering all aspects of property and life situations. Determining what kind of trust is right for you requires professional legal advice.
A living trust refers to a trust that may be revocable by the trust creator, known by the IRS as the grantor. It will allow assets to be passed to heirs without going through the probate process, which can save substantial costs. (Fees in probate court are sometimes based on a percentage of the deceased's net worth.) It also allows you to maintain privacy; probate records are open to the public, while assets distributed through a trust are private. Living trusts also can be utilized to plan for unforeseen circumstances such as incapacity or disability.
The person or persons setting up the trust may also serve as trustee or co-trustee. If there is more than one trustee, the trust document may allow one trustee to act alone on behalf of the trust or require that both trustee sign or act together.
It can be expensive to set up the trust, resulting in up-front fees that could be delayed until the grantor's death. In the long-term, depending on the circumstances, the upfront costs may be significantly less than probate costs, and the process for distributing the estate is generally much faster than probate.
Despite the advantages, there are also some negative aspects to a living trust. Beneficiaries do not save beneficiaries federal estate taxes or state inheritance taxes. Married couples who establish a trust can, however, effectively double estate tax exemptions by setting up the trust with a "formula clause." This allows the distributions from the trust to be established by a formula that allows the beneficiaries to take advantage of the changes in the federal estate taxes that increase each year through 2010. The remainder of the trust will remain with the surviving spouse to take advantage of the unlimited spousal deduction allowed under the internal revenue code.
Parties To The Trust
- The person who sets up the trust; also known as the settlor, trustor or trustmaker.
- The person who will manage the trust assets. This also may be the grantor in a revocable living trust, since the person would usually want to manage his or her own property. In some revocable living trusts, or "self settled trusts," the grantor is also a beneficiary of the trust.
- Where the grantor is a trustee, the successor trustee is the person who will manage the trust assets when the grantor dies or becomes incapacitated. If the grantor has died, the successor trustee will immediately have the same powers that the grantor had as trustee to buy, sell, borrow or transfer the assets inside the trust. They will also have the right to distribute the trust's assets according to the instructions in the trust instrument. They cannot change the trust, as it becomes irrevocable upon the grantor's death.
- The people who will receive the benefit of the trust's assets are called beneficiaries. Sometimes, the grantor is the original beneficiary. Beneficiaries who take after the grantor's death are called "remainder beneficiaries."
Establishing a Living Trust
To setup a living trust, an individual transfers title of his assets from himself as grantor, to a trustee of the trust (often the trustee and grantor are the same person). The trustee then administers the trust for the benefit of the grantor and at least one other person. The trust may also name the remainder beneficiaries who will take over after the grantor dies. The beneficiaries get nothing until that person dies.
In some cases, depending on the size of the trust, it could be advisable to use a corporate trustee such as a bank. One advantage of a corporate trustee is that it can act in perpetuity, whereas an individual cannot. Corporate trustees must provide accurate and detailed records (an accounting) of all transactions that take place in the trust, for however long the trust exists. Most state laws allow the corporate trustee to act in a "directed capacity," meaning that they would be required to have oversight of the trust's investments, but not the day-to-day management of the trust.
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