ON THE MONEY: Trusts can address many financial needs

November 25, 2018

Why are trusts such valuable financial instruments? Simply stated, because they can solve a myriad of financial and estate planning needs.

Trusts are not new, dating back to circa 4000 B.C in Egypt, when individuals who were the equivalent of today’s trustees were given the tasks of managing other persons’ property. The use of trusts continued in ancient Rome where the first usage of trusts for charitable purposes was introduced. In the Middle Ages, as English knights and other noblemen of the landed gentry class went off to fight in the Crusades, trusts underwent further development under English common law. Many of the trust principles developed during that period have endured until today.

Trusts were first recognized as legal entities in the United States in 1822, with the chartering of Farmer’s Fire Insurance and Loan Company in New York.

Trusts have long been regarded as tools for the super-wealthy to protect their wealth, and while that is true to a degree, one doesn’t have to drip with wealth in order to benefit from the judicious use of a trust.

A trust is nothing more than a legal document in which the legal ownership of certain property (the trust corpus or trust principal) held within the trust is separated from the beneficial ownership of the property. The person or institution who is deemed to be the legal owner of the trust assets and who is responsible to manage and invest those assets is known as the trustee. Those persons who receive the benefits or income generated from trust assets are known as trust beneficiaries.

The person who establishes the trust in the first place is usually referred to as the trust grantor, while the provisions, purposes, duration, trustee powers and all other matters concerning the trust are contained in the trust document. The grantor must decide what assets will be place in the trust; who will benefit from the trust; how will the trust be managed; and who will be named as the trustee.

Trusts may address many important functions:

• A trust can reduce income and estate taxes.

• A trust can ensure that its assets are managed professionally.

• A trust can operate until children and grandchildren can acquire the needed skills to manage their own affairs.

• A trust can prevent a family business from having to be unnecessarily sold or divided.

• A trust can protect against bad decisions made due to old age or medical impairments.

• Finally, a trust can ensure that when a grantor dies, benefits will be passed to the proper persons, at the proper time and in the proper amounts.

Trusts may be categorized in a number of different ways. First, a trust may be established by a grantor during his/her lifetime, which would make the trust an inter vivos (among the living) trust. They also may be established at the death of the grantor, and these are known as testamentary trusts.

Trusts may also be revocable, which means they may be changed or terminated by the grantor at any time until the death of the grantor.

Trusts which may not be changed during the lifetime of grantor are known as irrevocable trusts, and these trusts are most often used to help reduce estate taxes, since if one puts assets into a trust irrevocably, those assets are generally not part of the grantor’s taxable estate.

When a grantor dies, the trust he/she established during his/her lifetime becomes irrevocable, and all testamentary trusts, by their very nature, are irrevocable.

It is interesting to note that trusts are not part of the U.S. Tax Code, but rather are subject to the various state laws.

If a trust is a revocable grantor trust, the trust does not pay any income tax, but rather the grantor is taxed on trust income. However, if the trust is irrevocable, then the trust usually must pay federal and tax income taxes.

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