The Trust

What is the Purpose of a Trust and the Role of a Trustee?

A trust is created when the owner of an asset or assets (the “grantor”) transfers legal title of the asset(s) to someone else (the “trustee”) to manage for the benefit of the owner or a third party (the “beneficiary”). For assets to be held in a trust, such assets must be retitled in the name of the trust to effectuate a transfer of ownership from grantor to trust. The trustee can be an individual and / or a trust company. The trustee is charged with managing the trust pursuant to the terms of the trust agreement and for the benefit of the beneficiaries. A trustee will make distributions from the assets of the trust, either directly to, or for the benefit of, the beneficiaries according to the distributive provisions of the trust.

A trust has two components: the principal and the income. The principal (also referred to as the “corpus”) is the property that the trust owns. The income is the money earned from the trust’s principal, including stock dividends, interest earned on bank accounts or bonds, rents from real estate owned by the trust, and any earnings from a business owned by the trust. The trust document generally instructs a trustee on how to make payments from the trust, and how to determine if these amounts should come from income or principal. Distributions to a beneficiary can come from principal and / or income. A common dispositive provision allows income and principal distributions to a beneficiary, at the trustee’s discretion, for the beneficiary’s health, education, maintenance, and support. Another dispositive provision entitles the beneficiary to all of the income of the trust with distributions of the principal according to a specific standard, i.e. at certain ages or in the trustee’s discretion for certain extraordinary expenses (including, for example, purchasing a home, marriage, establishing a business, emergency medical expenses, etc.).

Some of the advantages of establishing a trust include the following:

• Protecting Your Assets and Your Beneficiaries. One of the main benefits of creating a trust is that the trust assets are not distributed to a beneficiary outright; instead, trust assets are protected and distributed according to the conditions you have placed upon distribution. This allows you to protect your beneficiaries, and the trust assets, from a variety of problems: a beneficiary’s creditors; divorce proceedings; lawsuits against a beneficiary; and / or a spendthrift beneficiary with poor financial sense. A trust also permits you to stipulate when and how assets are distributed. For example, you can stagger distributions to a beneficiary to be payable once a beneficiary has attained a certain age (i.e. one-third of the assets at age 35; one-half at age 40; and the remaining balance at 45). You can also provide support to your surviving spouse while ensuring that the remainder of the assets go to your other heirs (i.e. your children) after your spouse’s death instead of being used to support your spouse’s potential next marriage. You can further ensure that minor beneficiaries are well provided for after your death, especially in terms of educational expenses, by including such dispositive provisions.
• Avoiding Probate. For non-testamentary trusts, assets titled in the trust’s name are not considered probate assets and are not subject to the probate process. This allows you to distribute assets to your beneficiaries while bypassing the cost, delay, and publicity of probate court. A testamentary trust is established after the administration of your estate and those assets will pass through the probate court.
• Protection from Taxes. A trust can be utilized to shelter and protect your asset(s) from any federal and / or state inheritance, estate, transfer, death, or any other taxes that the asset(s) would be subject to otherwise.
• Philanthropic Giving. A charitable trust can be established to benefit a charity or charities. For example, a Charitable Lead Trust pays an income stream to a designated charity for a specified period of time and, after this time period has ended, the remainder of the assets are distributed to the donor or other designated beneficiaries. A Charitable Remainder Trust, on the other hand, allows a designated beneficiary to use the property and / or receive income from it for a term of years or for his / her lifetime; at the end of the term, the remainder passes to the designated charity.

A trust may be a beneficial estate planning tool for you and your loved ones if you have assets valued above $100,000. Trusts can be established through a trust agreement or through your Will (known as a “testamentary trust” which comes into existence after your death and once the administration of your estate has concluded). There are many varieties of trusts, each with a different purpose, so you can choose what type(s) of trust(s) best fits your needs, the needs of your family, and minimizes any potential taxes.

What Should I do Now?

The first step in creating a comprehensive estate plan is to contact an estate planning attorney. The advantages and disadvantages of establishing a trust should be thoroughly discussed. You should choose an estate planning attorney who can evaluate whether a trust would be beneficial to you and can offer recommendations based on a detailed understanding of your individual circumstances and objectives. Cole Law Group would be pleased to help you build a comprehensive estate plan that helps to fulfill your wishes and best protects your loved ones.

Call us at 615-490-6020 today to get started!