Why You Need a Trust

A trust is a device whereby one person holds title to property for the benefit of others. There are three parties involved in a trust.

• The Grantor or Settlor is the person who creates the trust by signing a trust agreement and transferring assets to the trust to be managed by ...

• the Trustee, the person or trust company, who holds title to the property for the benefit of ...

• the Beneficiaries, the individuals for whose benefit the trust is created.

In the case of a revocable living trust intended to function as a probate avoidance device, the grantor is frequently the trustee and beneficiary during his lifetime.

The trustee owes a duty of loyalty to both the grantor and the beneficiaries. He owes a duty to the grantor to administer the trust in accordance with the terms of the trust instrument. The trust instrument will tell the trustee who the beneficiaries are and under what circumstances they are to be given principal or income. If the trust instrument tells the trustee to distribute income or principal for the beneficiary's support and make distributions accordingly.

The trust instrument will also delineate the range of permissible investments of trust in your estate plan, you as the grantor set these guidelines. The trustee may not use the position for personal benefit. He must look only to benefit the beneficiaries when making investments. 

Why do we recommend the you create a trust when all you want is to leave everything to your spouse? There are three general reasons: (1) to save taxes, (2) to retain control over trust assets and (3) to protect the beneficiaries.

Save taxes. As a result of the unified credit, each individual may give total of $600,000 to anyone without paying federal estate or gift tax. In addition, you may leave an unlimited amount to your spouse tax-free as long as certain requirements are met, including that the property be taxed to your spouse when he or she dies.

Let's assume you have an estate worth $1.2 million, and your spouse has nothing. If you leave everything to your spouse outright, there is no tax at your death, but when your spouse subsequently dies with a taxable estate of $1.2 million, $235,000 will go to pay federal taxes, leaving only $965 for the children.

Can this $235,000 be saved? Yes, by using a trust. If you leave $600,000 for the benefit of your spouse in a trust that does not qualify for the marital deduction, that $600,000 will be sheltered from estate tax by your unified credit and will not be included in the surviving spouse's estate. The remaining $600,000 will be included in the surviving spouse's estate, but will not generate any federal estate tax upon his or her death because of the spouse's unified credit. The net result of using a trust in this situation is a tax savings of $235,000.

What restrictions does this impose on the spouse? If what you want, absent tax considerations, is an outright distribution to the spouse, there is very little lost buy using a trust. You can give the spouse:

• all income,

• the right to give assets away to family members during your spouse's lifetime, and

• the right to receive principal as needed for his or her comfortable support.

you can do similar planning to benefit your children and grandchildren and avoid the generation skipping transfer tax. Each individual can set aside $1 million ($2 million if the spouse joins) to pass to future generations without a tax each time a generation dies out. Again, a trust is required to accomplish this.

Control trust assets. If you ant to give your spouse the use of assets during his or her lifetime but make sure the assets ultimately pass to your children, you need a trust for both the first $600,000 and a second trust (marital trust) for the balance of your estate. You need two trusts because the trust that qualifies for the marital deduction must be different from the one that holds the first $600,000. Both trusts can be more restrictive than the trust described above, and you can guarantee that all principal of the trust will remain for your children. This concern for preserving assets for distribution to children is important to many individuals, especially those with children from prior marriages.

Protect beneficiaries. You may not want to give assets outright to a minor, a spendthrift or a disabled individual. Before gift and estate taxes, this was one of the principal reasons for using a trust. An individual (friend, family member, business associate, etc.) or a corporate trustee can act as a trustee to manage assets and make distributions to the beneficiary.

With minor children you may want to have a single trust (a spray trust) for all of them, but allow certain flexibility to treat each beneficiary differently. Let's say you have a five-year-old and 15-year-old child. To date, you've spent 10 more years rearing the 15-year-old child than the 5-year-old, with all the additional costs that entails. Your expenditures during the next 15 years or so are likely to be spent disproportionately on the five-year-old for the simple reason that the younger child is further from maturity, and presumably, economic independence than the older child. After both children reach adulthood, you're prepared to treat them equally. Using a spray trust allows the trustee to follow the same spending pattern for the younger child in spite of your death.

Because a spendthrift heir can be a problem for the entire family, you might want to consider a corporate trustee. Corporate trustees are often more experienced and better able to address the inconveniences that such a beneficiary may create for family members.

The use of trusts can be as varied as the people who create them. They are useful devices when properly drafted. Please call us to discuss whether the time is right for you to create a trust or to update an existing estate plan or trust.

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