A Look at Trusts, the Different Types, and How Trusts Complete a Good Estate Plan

ESTATE PLANNING: TRUST BASICS

RICHARD B. SCHNEIDER
OREGON ESTATE PLANNING ATTORNEY

Despite knowing how important it is to create a comprehensive estate plan, studies show that over half of all Americans do not have one. People give a wide variety of reasons why they have yet to create an estate plan with many of those reasons centering around the fact that people dont understand the process or the laws relating to wills, trusts, and estates. The old adage knowledge is power applies here because the more you already know about estate planning the more likely you will be to take the initiative and get started on your plan. Though your Last Will and Testament will likely be the foundation of your overall plan you may choose to include one or more trusts in your plan as well.

A trust is a separate legal entity. The purpose of a trust is to manage and protect assets that are intended for the benefit of a third party, or beneficiary. A trust requires five basic elements for creation: A grantor the person who creates the trust A trustee the individual, or company, that manages and oversees the trust. The trustee has numerous duties and responsibilities such as investing trust assets, payment of taxes, recordkeeping, distribution of assets to beneficiaries, and communication with beneficiaries. Beneficiaries you must designate one or more beneficiary. A beneficiary may be a person, an organization, a charity, or even a pet.

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Terms trust terms are created by the grantor and may include almost anything as long as the term is not illegal or impossible to fulfill. Funding you must transfer assets to be used to fund the trust into the trust. Assets may be cash, stocks, property, or almost anything else of value.

The reasons for including a trust in an estate plan are varied and numerous; however, some of the common reasons why a trust is a popular addition to an estate plan include: Probate avoidance a properly constructed trust allows the assets held in the trust to avoid the probate process, making them immediately available to beneficiaries. Tax advantages a trust can help decrease your taxable estate at the time of your death, thereby lowering the amount of gift and estate taxes due from your estate. Continued control a trust allows the grantor to create trust terms that will, in effect, allow a certain amount of continued control over the use of the assets by the beneficiaries. Staggering inheritance a large inheritance left to a young, or financially nave beneficiary, can be a huge mistake. A trust allows you to stagger the gift over many years, decreasing the likelihood that the gift will be squandered. Guarding assets for minors gifts cannot be left to minors. Creating a trust is an excellent way to guard the gift and grow the funds until the intended beneficiary is old enough to legally benefit from the gift.

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There are four basic types of trusts that define how the trust will operate and how it will be taxed. In essence, all trusts start from here. Those important types are: Testamentary a testamentary trust is a trust that does not become effective until your death. Typically, you will include instructions in your Last Will and Testament that activate the trust. Parents of minor children often create a testamentary trust because it will only be needed if the parent dies before the child reaches the age of majority. Inter Vivos (Living) an inter vivos, or living, trust becomes effective as soon as all of the formalities of creation are completed and assets are transferred into the trust to fund the trust. Revocable a revocable trust is a trust that can be changed by you, the grantor, at any time and for any reason. You can add or delete a beneficiary, increase or decrease assets, replace the trustee, or even terminate the trust whenever you wish. Irrevocable as the name implies, an irrevocable trust is one that cannot be changed once effective. Assets transferred into an irrevocable trust cannot be removed once transferred and are legally no longer owned by the grantor. While there are some exceptions preventing changes to an irrevocable trust (for example a court can terminate or change an irrevocable trust under limited circumstances), you should take great care when creating an irrevocable trust and operate under the assumption that once created it is written in the proverbial stone.

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Trusts have evolved considerably over the last century. Where they were once used primarily by wealthy families as a mechanism to pass down family wealth from one generation to another, trusts are now used by the average estate planner for a wide variety of purposes. Through the careful creation of trust terms you may tailor your trust to meet your own specific goals; however, there are also a variety of specialized trusts that may already be designed to fit your goals. Some of the more popular specialty trusts include: Asset Protection Trust also referred to as a spendthrift trust this type of trust can protect the trust assets from both the poor financial habits of the beneficiary and from creditor claims. If you have an adult child, for instance, who has struggled with an addiction problem and has been less than careful with finances as a result, you might want to consider creating a spendthrift trust so that the beneficiary cannot squander the assets and creditors of the beneficiary cannot get to the assets.

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Special Needs Trust also referred to as a Supplemental Needs Trust, this type of trust allows you to provide supplemental financial assistance for a special needs beneficiary over and above the assistance provided by government assistance programs without creating a situation where the gift works to disqualify the beneficiary from these programs. Charitable Trust a charitable trust allows you to gift to a charity that is important to you. Within this category are charitable remainder and charitable lead trusts. One allows you to gift first to a charity and then gift the remainder to a non-charitable beneficiary while the other provides a gift to a non-charitable beneficiary first with the remaining assets gifted to the charity. Pet Trust even the family pet can benefit from a trust. Pet trust lets you decide how your pet will be cared for in the event you predecease him or her. It also ensures that sufficient funds will be available for your pets care when the time comes. Generation Skipping Trust this is a trust that is specifically designed to protect assets that are exempt from the generation skipping tax. It is often used by families to pass wealth down to future generations with as few tax consequences as possible. As you can see, a trust can be an extremely beneficial addition to any estate plan. Consult with your estate planning attorney to decide which types(s) of trust will work best in your overall estate plan to reach your goals and objectives.

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American Bar Association, Trusts U.S. Trust, Trust Basics Living Trust Network, Types of Trusts

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About the Author

Richard B Schneider
Before devoting his professional efforts primarily to estate planning, Mr. Schneider spent over fifteen years working on Wall Street for major law firms and investment banks. After graduating from law school, he practiced general civil law in New York City for five years, specializing in business transactions, financings and corporate matters. He also represented major investment banking firms in mortgage trading and real estate-related matters. Among his clients were international shipping companies, commercial and investment banks and institutional lenders, including General Electric Capital Corporation, Salomon Brothers and Merrill Lynch. For the next ten years Mr. Schneider served as Senior Vice President at the investment banking firm of Kidder, Peabody, where he managed outside legal counsel for a variety of large financial transactions between major institutions. He played a central role in the creation of Kidder, Peabodys mortgage trading subsidiary and advised and executed transactions with insurance companies, pension funds and government agencies, including the Resolution Trust Company. In 1996 Mr. Schneider established a residence in Portland, Oregon and began his law practice there in 1997. He has made a long-term commitment to providing first-class estate planning legal services to families and individuals within the Portland metropolitan area and the surrounding SW Washington region. His motivations for moving to the Northwest were several: the natural scenic beauty of the Northwest landscape, the clean air and streets, the healthy, diversified economy and the overall high quality of life. Mr. Schneider is very grateful for the warm reception he has received from Portland/Vancouver and is pleased to have become a respected member of the Portland/Vancouver legal and business community. Mr. Schneider is a member of the American Academy of Estate Planning Attorneys, the National Academy of Elder Law Attorneys, the Estate Planning Council of Portland and is on the board of directors of the the Rental Housing Association of Greater Portland. He is admitted to practice in Oregon, Washington and New York. Law Offices of Richard B Schneider, LLC www.rbsllc.com 2455 NW Marshall St, Suite 11 Portland, OR 97210 Phone: (503) 241-1215

Estate Planning Trust Basics

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