A trust is a contract document that establishes a separate entity to hold and distribute property that you place into it, during your lifetime and, if desired, after you pass away. This legal structure possesses individual and independent rights, much like an individual, LLC or a corporation. In this arrangement, the person or persons who establish the trust (called a “settlor,” “trustor,” or “grantor”) give another person or persons (referred to as the “trustee”) the authority to hold and oversee the property or assets that are in the trust on behalf of a third party, referred to as the beneficiary or beneficiaries.

Trusts can be revocable or irrevocable, and serve the purpose of offering legal safeguarding for the assets of the trustor, keeping the assets and the beneficiaries private, avoiding probate for assets that are held in the trust, and ensuring the distribution of trust assets aligns with the purposes described in the trust. Beyond providing protection, trusts can streamline processes, minimize paperwork, and in certain cases, decrease inheritance or estate taxes.

Key Takeaways:

  • A trust is a legal entity that allows you to direct the distribution of your assets after death.
  • Trusts offer benefits such as keeping your assets and beneficiaries private, avoiding probate proceedings, reducing distribution times to beneficiaries after your death, minimizing hassles, reducing fees, and enabling efficient estate settlement.
  • Working with professionals, you can create a trust to minimize taxes, protect assets, and ensure your last wishes are carried out.
  • Trusts provide control over asset distribution and payment structures, making them a valuable tool in estate planning.

What Are The Benefits of a Trust?

Many individuals opt for trusts to streamline the asset distribution process, minimize fees, avoid probate, keep their estates private, and establish a legacy of charitable giving. Trusts go beyond wills, offering planning benefits like tax minimization, asset protection, and a faster resolution in settling estates. By working with legal or financial experts, you can design a trust that not only ensures your last wishes are honored but also provides a strategic approach to managing your assets after your passing.

  • Legal protection for assets
  • Efficient distribution of assets according to the trustor’s wishes
  • Time and paperwork savings
  • Potential reduction in inheritance or estate taxes

Is a Trust Better Than a Will?

Advantages of a trust over a will include tax planning benefits, avoiding probate, keeping assets and distributions private, allowing distributions to be made almost immediately after a person’s death, and increased control over asset distribution. For personalized guidance, considering professional assistance from De Alicante can help you make an informed decision based on your specific circumstances.

Should I Set Up a Trust?

While trusts offer numerous advantages, it’s essential to consider the pros and cons of trusts vice other forms of estate and tax planning. Seeking counsel is recommended to navigate the complexities. The benefits include minimizing taxes, protecting assets, keeping assets and beneficiaries private, being able to make distributions very soon after a person’s death, and providing a structured approach to asset distribution. While disadvantages include initial cost and complexity, ongoing management, and that it’s not suitable for all.

The assistance of professionals like those at De Alicante can prove invaluable in the trust creation process.

The People Involved in a Trust

Understanding the roles in a trust is crucial:

Role of the Settlor/Grantor/Trustor

A settlor, also known as a grantor, trustor, or trustmaker (but referred to here as a “settlor” – think of it as the person or persons who “set” the trust up), establishes a trust. Their role is to legally transfer control of an asset to a trustee for the benefit of one or more beneficiaries. The settlor maintains rights that nobody else has, such as the ability to make changes to or revoke the trust. The settlor will never, ever change.

Role of the Trustee

The trustee manages the assets held in the trust, ensuring they are invested, utilized and distributed according to the terms set by the settlor. The original trustee is often the same person as the settlor, but the trustee will change at some point, usually at the original trustee’s incapacity or death.

Role of the Beneficiary

A beneficiary is the individual or group for whom a trust was created, benefiting from the assets held in the trust. The beneficiary most often is the person who established the trust (the settlor) and will usually change, i.e. when the original beneficiary dies.

How a Trust Works

  1. Determine the type of trust needed.
  2. Create a trust document with legal assistance.
  3. Get the document signed, notarized, and potentially witnessed.
  4. Open a trust account to hold various assets.
  5. Transfer assets into the trust account.

Consult with legal or financial professionals for guidance on complex trust decisions.

Funding a Trust

Funding a trust involves transferring assets into the trust account to be managed for the benefit of the beneficiaries.

Managing a Trust

The trustee is responsible for ensuring prudent investment and distribution of trust assets as described in the trust, often with the assistance of an investment advisor.

Distributing Trust Assets

The distribution of trust assets can happen outright, over time, or at the trustee’s discretion, depending on the terms set by the settlor.

Understanding the roles and processes involved in trusts is crucial for making informed decisions about asset protection and distribution.

Types of Trusts

There are various types of trusts, each serving different purposes. Here’s a brief overview:

  • Grantor Trust: Commonly referred to as a Revocable Living Trust. This serves as a flow through entity for all of your property but is not recognized as a taxable entity by IRS – the settlor files taxes as if the trust does not exist.
  • Marital or “A” Trust: Designed to provide benefits to a surviving spouse, generally included in the taxable estate of the surviving spouse.
  • Bypass or “B” Trust: Also known as a credit shelter trust, established to bypass the surviving spouse’s estate to make full use of federal estate tax exemptions for each spouse.
  • Testamentary Trust: Outlined in a will and created through the will after death, subject to probate and transfer taxes.
  • Irrevocable Life Insurance Trust (ILIT): Excludes life insurance proceeds from the taxable estate while providing liquidity to the estate and/or beneficiaries.
  • Charitable Lead Trust: Allows certain benefits to go to a charity, with the remainder going to your beneficiaries.
  • Charitable Remainder Trust: Provides an income stream for a defined period, with the remainder going to a charity.
  • Generation-Skipping Trust: Distributes assets to grandchildren or later generations without incurring generation-skipping tax or estate taxes on the subsequent death of children.
  • Qualified Terminable Interest Property (QTIP) Trust: Provides income for a surviving spouse, with assets going to additional beneficiaries named by the deceased.
  • Special Needs/Supplemental Needs Trust (SNT): A trust established either during the settlor’s lifetime or as a testamentary trust, that is established to benefit a person who is on government assistance and who would be disqualified from that assistance if they received an inheritance outright. The SNT forces the government to continue providing for the basic needs of the person who is on government assistance, and is established to provide additional support for things that are beyond the government assistance that is provided.
  • Grantor Retained Annuity Trust (GRAT): Irrevocable trust funded by gifts from its grantor, designed to shift future appreciation on quickly appreciating assets to the next generation during the grantor’s lifetime.

Revocable vs. Irrevocable Trusts

Revocable Trust:
Can be altered or revoked by the trustor during their lifetime.
Often used to avoid probate but does not provide estate tax relief.

Irrevocable Trust:
Cannot be altered or revoked by the settlor after creation without approval by a Court, or in some cases be agreement of all of the beneficiaries.
Provides more significant asset protection and potential tax advantages.
Cases where one may be used over the other depend on specific goals and circumstances.

Trusts and Taxes

Tax Advantages

  • Estate Tax Planning: Trusts may help minimize estate taxes.
  • Income Tax Efficiency: Certain trusts provide income tax benefits.
  • Generation-Skipping Tax Exemption: Utilizing trusts to distribute assets to grandchildren without incurring taxes.

Tax Disadvantages

  • Complexity: Tax rules regarding trusts can be intricate.
  • Potential Tax Liability: Irrevocable trusts may face tax consequences.

Misconceptions About Trusts

Trusts are Just for Rich People

Trusts aren’t exclusively for the wealthy. They offer peace of mind, ensuring assets go to the right people, regardless of the estate’s size, retain privacy about your estate, avoid probate, and allow distributions to be made after your death without a long waiting period, often resulting in less family conflict.

Trusts Avoid All Estate Taxes

Not true, especially for revocable trusts. While they help avoid probate and you can do some tax planning/tax avoidance within a carefully crafted trust, they do not necessarily shield assets from all estate taxes.

Trusts Are Too Difficult to Manage

While trusts can be complex, with a good understanding of how trusts work, they are regularly successfully managed by non-experts. The length of a trust document is necessary to address multiple possible scenarios, comply with all statutes and case law, and provide parameters for administration. As a respected trust attorney in Bend, Oregon, De Alicante Law Group can assist in understanding and managing trusts effectively.