What is a trust and how can you create one?

A trust is a fiduciary relationship where a trustee holds assets on behalf of one or more beneficiaries.

How can I help you in creating a trust?

Once you contact us:

• You’ll be working with one of my assistants, who will go through your assets.
• I’ll start working as a financial advisor, go over the files, and get back to you.
• I’ll make sure you understand why you should create a trust and what kind would be beneficial.
• I can give you legal advice on the advantages and disadvantages of creating a trust.
• I can explain the various types of trusts and identify your special needs to minimize your beneficiaries’ tax implications through a solid tax planning strategy.
• I will assist you in understanding every aspect of an estate plan and a trust arrangement.
• I will help you create a trust in accordance with US law. By doing so, you can legally protect your assets against incompetent beneficiaries, even if you aren’t alive.

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Call us to learn more about our services, payment plans, and affordable fee structure.

What is a Trust?

A trust is a legal relationship in which one entity (the trustee) grants another entity (the trustee) the power to retain title to assets or properties on behalf of a third entity (the beneficiary).

Trusts are formed to offer legal rights and protection for the trustor’s properties, ensure that those assets are transferred according to the trustor’s desires, save time, decrease paperwork, and prevent or reduce inheritance or estate taxes.

Developing a trust costs time and resources, and it is not quickly rescinded. A trust can be applied to specify how a person’s money should be managed and dispersed while they are living or after they die. It can safeguard assets from creditors and dictate the terms of inheritance for beneficiaries. Because trusts help you avoid taxes and probate, your beneficiaries may be able to access these assets more rapidly than they would if they were distributed using a will. If it is not a revocable trust, it may not be considered part of your taxable estate, resulting in lower taxes due after your demise.

A trust is another efficient option to provide for an underage beneficiary or a beneficiary with a mental condition that may limit his or her ability to handle finances. The beneficiary can start managing the assets and get the trust once he or she is capable enough to do so, mentally and physically.

What is the purpose of a trust?

Many people create trusts to get benefits such as:

• Trusts provide several crucial estate tax planning advantages that a will does not.
• You can designate trustees to carry out your desired estate plan as specified in the trust fund.
• Determine what happens to your real property and assets when you die and when your beneficiaries can access them. This is especially important if the beneficiary is a minor or a family member whose capacity to manage money is unreliable.
• While working with an attorney or a financial advisor, you can set up a trust to reduce taxes, protect assets, and shield your beneficiaries (for example, your children) from paying estate taxes, court fees, and other costs.
• Protect your assets from creditors who may have a claim on your beneficiaries’ assets or from loss due to divorce settlements.
• In the event of a beneficiary’s death, specify where any remaining assets should be distributed. This can be useful in a family with second marriages and stepchildren.
• Avoid the time-consuming probate court process.
• It is helpful to establish a philanthropic giving legacy.

What are the main duties of a professional trustee?

A professional trustee is a person who is not considered as a beneficiary of the trust and who professionally manages the trust. A trustee may also be called a fiduciary. He or she is paid to manage a trust on behalf of one or more beneficiaries.

Being a professional trustee, this person has a number of fiduciary duties to the beneficiaries. Their primary responsibilities are loyalty, wisdom, and impartiality. The trustee must be very careful with his or her duties, and guarantee that beneficiaries receive their due properly. The trustee also should be transparent and open while performing record-keeping, accounting, and disclosure.

A trustee should know, comprehend, and follow the conditions of the trust and applicable laws. The trustee may be compensated and have expenses reimbursed by the trust estate, but otherwise he or she must pass over all earnings from trust properties. The trustee should not incur debt or riskily speculate on trust assets without the written, unequivocal permission of all adult beneficiaries, such as a surviving spouse.

Trustees are well paid for their services in managing a trust. A Professional Trustee’s fees typically vary from 1 to 3 percent of the trust’s total assets. This can vary depending on how much work the Trustee is required to complete.

If a trustee fails in any of his or her responsibilities, the courts have the authority to reverse his or her acts, revoke earnings, and apply other penalties. Such a failure constitutes a civil breach of trust, and a negligent or dishonest trustee may face serious penalties for the violation.

When is it a good idea to hire a professional trustee?

• High-value assets are present in the estate - A Trust may include a combination of rental properties, current investments, and sizable amounts of wealth. Some or all assets, such as real estate properties, stocks/bonds may be retained in the Trust, generating revenues, losses and incur expenses.
• The beneficiary is below 18 - If the trust’s beneficiaries are minor, they cannot lawfully operate their trust on their own. Technically, a beneficiary cannot even obtain a trust until they reach a certain age, preferably the age of 18 or older, as instructed by the Trustor.
• It is found to be in the beneficiary’s best interests - Even though the beneficiary is of legal age and competent, a Trustor may determine that it is better if someone keeps a watch on the Trust.
• The beneficiary is disabled or has mental illness - A Professional Trustee may be required if the beneficiary has special needs or a handicap, especially if the condition may impair their capacity to handle funds on their own.
• Beneficiaries don’t have enough time for additional duties - Managing a Trust can take a lot of time and effort. If the beneficiaries lead busy lives with their professions and responsibilities, there may not be enough room in the day to administer a Trust and handle.
• A family member is unable to act as a trustee - A family member may have served as trustee in the past, but they no longer want the duty of managing a Trust for another person, or they are no longer capable of doing so.

Why should you get legal help to create a trust?

If you believe your property may be subject to estate taxes, an estate attorney may be your best option for avoiding it. If the situation in your family is complicated, typically in situations where your estate is worth enough to trigger the estate tax, then an attorney can help you make a trust that distributes it according to your wishes.

A living trust is a trust that is created while the trustor is still alive. They can be set up as a revocable or irrevocable trust. In either case, a living trust helps to avoid probate, and can result in trust assets being distributed much more quickly.

By avoiding probate, your family can maintain its privacy. Probate is a legal process, and as a result, much of the proceedings become a matter of public record. Creating a trust will keep your family matters a secret.

Deciding what assets to include in a trust can be a complicated matter. In most cases, you and your family will receive the most protection by consulting an attorney and establishing the trust with their help. You may even have the option to add a no-contest clause while creating a trust document.

A qualified trust attorney also elaborates that assets under a trust may generate revenue, which may be taxed as income or capital gains. Whoever pays the tax is determined by the one who legally owns the assets. If a charity receives the income directly, the donation may be tax deductible.

An estate tax attorney will inform you that if you have a large estate, you may be subject to federal estate tax after you die. In 2020, the federal estate tax typically applied when a person’s assets at the time of death exceed $11.58 million. The estate tax rate might be as high as 40%.

Because some states have their own estate taxes (and set their own estate size limitations), there may be two estate tax bills to be paid: one to the federal government and one to the state.

What are the main categories of trust?

Although there are many forms of trusts, each falls into one or more of the categories listed:

1. Living trust or Testamentary trust

A living trust, also known as an inter-vivos trust, is a written contract that places an individual’s assets in trust for the individual’s use and profit during his or her lifespan. When an individual dies, properties are transferred to the beneficiaries. The assets are transferred by a replacement trustee appointed by the individual.

A testamentary trust, sometimes known as a will trust, holds assets and outlines how they are designated after death.

2. Revocable trust or Irrevocable trust

The trustor can amend or cancel a revocable trust during his or her lifespan. Living trusts can be revocable or irrevocable.

As the title suggests, an irrevocable trust is one that the trustor cannot amend after it is made or one that becomes irrevocable upon his death. Only testamentary trusts are allowed to be irrevocable.

In most cases, an irrevocable trust is preferable. This is because the assets that have been permanently removed from the trustor’s ownership permit estate taxes to be lowered or avoided entirely.

3. Funded trust or Unfunded trust

The trustor’s assets are placed in a funded trust during his or her lifespan. An unfunded trust is one that merely has the trust agreement and no funding. Unfunded trusts can either become funded or remain unfunded upon the death of the trustor.

Proper funding is essential because an unfunded trust reveals assets to many of the risks that trust is designed to stop.

What are the different types of trust funds?

The following are some of the more prevalent forms of trust funds:

• Joint trusts - When two people desire to create a trust together, a Joint trust is the best alternative. This is an appropriate sort of trust for a married couple. Both can maintain control of the assets during the couple’s lives, and upon one partner’s death, the surviving partner immediately becomes trustee.
• AB trusts - An AB Trust is a type of trust that is comparable to a joint trust. Married couples construct it to reduce estate taxes. The trust is called AB because, following the first person’s death, it divides into two Trusts: the “A” Trust becomes the Survivor’s Trust, and the “B” Trust becomes the decedent’s trust.It’s an efficient tax avoidance strategy because the first partner’s death would not generate estate taxes. Instead, his or her part (up to the estate tax exemption) will turn into an Irrevocable bypass trust. The rest would be transferred to the Survivor’s Trust (“A”) and would not be taxed until his or her death.
• Credit shelter trust - Also known as a bypass trust or family trust, permits an individual to leave a sum up to (but not above) the estate-tax exemption. The surviving spouse will get the remainder of the estate with no taxes. Funds put in a credit shelter trust are exempt from estate taxes for a lifetime.
• Spendthrift trust - This trust shields the assets from being seized by creditors. This trust also allows an independent trustee to oversee the assets and prohibits the beneficiaries from selling their share in the trust.
• Asset protection trusts - Another approach to shield your assets from creditors is to set up an asset protection trust. Apart from an irrevocable trust, this is the most secure alternative if you are concerned about judgments or other risks to your estate. However, creating such trust may cost you a lot.
• Totten trust - Also known as a “poor man’s trust’’ or payable-on-death account, this trust is established during the trustor’s lifespan, who also serves as trustee. It is commonly used only for bank accounts. Physical properties cannot be added to it. The most significant benefit is that assets in the trust are not subject to probate upon the trustor’s death. It does not require a formal estate agreement and is often free to establish. It is easy to establish by including distinctive text in the account title, such as “In Trust For,” “Payable on Death To,” or “As Trustee For.”
• Insurance trust - It is an irrevocable trust that holds a life insurance cover and removes it from estate taxes. While it is impossible to borrow against the insurance or change the beneficiaries, the income can be used to cover estate costs when an individual passes away.
• Special needs trust - This trust is intended for a dependent receiving federal assistance, such as Social Security disability benefits. Setting up a trust allows the disabled individual to collect money without jeopardizing or forfeiting government benefits.
• Separate share trust - A parent can use this trust to set up a trust with separate provisions for each beneficiary, such as kids.
• Generation-skipping trust - A generation-skipping trust permits an individual to transfer assets to beneficiaries absolutely tax-free. The beneficiaries should be at least two generations younger (for example: grandkids.)
• Qualified personal residence trust - This trust excludes a person’s primary residence (or vacation house) from their estate. This trust could be helpful if the properties are expected to appreciate significantly.
• Qualified terminable interest property trust (QTIP trust) - This qualified terminable trust permits an individual to distribute assets to targeted beneficiaries, their survivors, at certain points in time. In most cases, a spouse will get permanent income from the trust, while kids will receive whatever is left when the spouse dies.
• Blind trust - This trust allows the trustees to manage the trust’s resources without the beneficiaries’ consent. If the beneficiary needs to avoid conflicts of interest, this could be beneficial.
• Charitable trust - A charitable trust serves a specific charity or non-profit company. A charity trust is typically formed as part of an estate plan to help reduce or eliminate estate and gift taxes. A charitable remainder trust, funded during a person’s lifetime, distributes income to selected beneficiaries (such as kids or a surviving spouse) for a specific duration before donating the remaining assets to charities.

What are the differences between trusts and wills?

There are several differences between trusts and wills. To learn more about the differences, check out the FAQ 14 Here.