Articles Posted in Trusts

A trust is a legal arrangement where one person (or an institution such as a bank or law firm), called a “trustee”, holds legal title to property for another person, called a “beneficiary”. If you have been appointed the trustee of a trust, this is a strong vote of confidence in your judgment. It is also a major responsibility.

As a trustee, you stand in a fiduciary role with respect to the beneficiaries of the trust, both the current beneficiaries and any remaindermen named to receive trust assets upon the death of those entitled to income now. As a fiduciary, you will be held to a high standard, meaning that you must pay more attention to the trust investments and disbursements than you would for your own accounts.

Your investments must be prudent, meaning that you cannot place money in speculative or risky investments. In addition, your investments must take into account the interests of both current and future beneficiaries. For instance, you may have a current beneficiary who is entitled to income from the trust. He would be best off if you invested the funds to generate as much income as possible. However, this would not be in the interest of remainder beneficiaries who would be happiest if you invested for growth of the principal. In addition to balancing the interests of the various beneficiaries, you must consider their future financial needs. Does a trust beneficiary anticipate buying a house or going to school? Will he be depending on the trust income for retirement in 15 years? All of those questions need to be considered in determining an investment plan for the trust.

One of your jobs as trustee is to keep track of all income of the trust and expenditures by the trust. You must give a periodic account of this information to the beneficiaries.

Depending on whether the trust is revocable or irrevocable and whether it is considered a grantor trust for tax purposes, the trustee will have to file an annual tax return and may have to pay taxes. In many cases the trust will act as a pass through with the income being taxed to the beneficiary.

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In her article, Practical Tips and Tricks on What You Should Do With Your Estate Plan, Julie Garber advises completely funding your revocable living trust so that all of your assets can be managed by the trustee.

Ms. Garber states, ” Many people fail to realize that funding their trust is just as important as creating it. If an asset isn’t titled in the name of the trust, then the trust agreement won’t control what happens to that particular asset . . . . ”

To title an asset in a trust the title of the asset needs to be changed to the trust.

Example: Title to the summer home is currently in “John Smith”. By changing the title to “John Smith and Jane Smith, Trustees, or their successors in trust, under the John Smith Living Trust, dated January 1, 2009, and any amendments thereto” the summer home is titled in the trust.
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Generally, to qualify for the marital deduction and avoid estate tax (imposed on estates with assets over $5.43 million in 2015) when you die, your property must pass to your spouse directly or in a trust where he has complete control over the principal. A Qualified Terminable Interest Property Trust (QTIP Trust) is an exception to this rule.

A QTIP Trust allows you to separate your property into two parts. One part is the interest or income the principal generates. The other part is the principal itself. An example is stocks and bonds (the principal) and dividends and interest (income).

By separating your property this way, you can direct that each piece benefits a different person. So long as the QTIP Trust directs that your spouse receives all of the income from the trust during his lifetime, the QTIP Trust will qualify for the marital deduction and no estate tax will be due.

QTIP Trusts are commonly used in the situation where there is a second marriage. The spouse who has children from a first marriage wants to ensure that his children receive the principal and also wants to ensure that his surviving second spouse will benefit from the interest generated. The QTIP Trust allows for both.
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A Special Needs Trust (a/k/a Supplemental Needs Trust) is set up to ensure that a disabled individual receives benefits, such as Supplemental Security Income and Medicaid, while also enjoying extras that provide for a good quality of life.

A Third Party Special Needs Trust is funded by a friend or family member’s assets. A Self-Settled Special Needs Trust is funded by the disabled person’s assets.

The disabled person is always the beneficiary and is never the trustee of the Special Needs Trust (SNT). In practice, the way a SNT works is the beneficiary asks the Trustee to make a distribution. If the Trustee feels the distribution is allowed under the terms of the SNT and it is in the best interest of the beneficiary, the trustee pays for the goods or services directly from the trust account. The Trustee can also determine on his own that the beneficiary is in need of or would enjoy an allowed good or service. The money never passes through the beneficiary’s hands. This is important because any money the beneficiary controls may reduce his Supplemental Security Income or may cause a loss of Medicaid benefits.
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It is often best to avoid probate, the court supervised process which makes sure that a deceased person’s assets are properly distributed. The probate process is costly and time consuming (usually 12 -14 months depending on the county). It also is a matter of public record, so your financial affairs become public information.

A Living Revocable Trust is a basic estate planning tool used to avoid probate. A living trust is drafted and assets such as real estate, accounts at financial institutions and other investments are titled in the trust. A trustee (relative, close friend, lawyer or financial institution) is given authority to distribute your assets when you die.

Because the trust is revocable, you can change its terms or get rid of it completely if you like.

For income tax purposes, the living trust has no effect. The income from the assets in the trust is reported on your Form 1040 as are any deductions related to those assets.
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For a Revocable Living Trust to function property, it is not enough for the Grantor (the individual who made the trust) to simply sign the trust agreement. He must fund his assets in the name of the trust.

Funding refers to taking assets that are titled in the individual Grantor’s name or in joint names with others and retitling them into the name of the Grantor’s Revocable Living Trust, or taking assets that require a beneficiary designation and renaming the Grantor’s Revocable Living Trust as the primary beneficiary of those assets.

The goal of funding a Revocable Living Trust is to insure that the Grantor’s property is governed by the terms of the trust agreement. This allows the Disability Trustee to manage accounts held in the name of the Grantor’s trust in the event the Grantor becomes mentally incapacitated and allows the Death Trustee to easily manage and then transfer accounts held in the name of the Grantor’s trust to the ultimate beneficiaries named in the trust agreement after the Grantor’s death.

The Trustee of a Revocable Living Trust has no power over the Grantor’s property that has not been retitled in the name of the Grantor’s trust. If the Grantor becomes mentally incapacitated, the Grantor’s loved ones will need to establish a court supervised guardianship to manage the Grantor’s assets that are not held in the name of the Grantor’s trust.

This means the Grantor’s property which has not been retitled into the name of the Grantor’s Revocable Living Trust will have to be probated after the Grantor’s death. This defeats one of the main benefits of a Revocable Living Trust which is avoiding probate.
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When parents set up a Third Party Special Needs Trust, it is created by and funded with the assets of the parents. The parents are considered to be the “third party”. The trust is not set up with the assets of the special needs child and the transfer may not be created to make the parents eligible for Medicaid paid nursing home care.

The Trustee has wide discretion in making distributions to or for the benefit of the special needs child. For this reason, the Trustee should be familiar with and responsive to the particular needs of the special needs child, should have knowledge of the government benefit programs and the effect the trust may have on eligibility for these programs, and should be in good health, reliable and financially astute.

If a special needs child has received an inheritance, gift, bequest, lawsuit award or settlement, child support, alimony or divorce property settlement, the receipt of these assets can disqualify a child for means tested benefits such as Medicaid and Supplemental Security Income. In cases like these, a Self-Settled Special Needs Trust should be established to preserve the child’s eligibility for the government benefits. Better practice is to have a Third Party Special Needs Trust already in place so that the inheritance, gift, bequest, lawsuit award or settlement, child support, alimony or divorce property settlement can be made payable to the Third Party Special Needs Trust thereby allowing any Special Needs Trust funds remaining after the death of the special needs child to be distributed to remaining family members.
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Children under the age of 18 cannot directly inherit more than a small amount of money. If you make no provisions in your Will, a court will appoint a property guardian to manage your child’s assets until he reaches 18.

That property guardian may be a stranger who will add another layer of bureaucracy to the situation. When your child needs money, formal requests will need to be made through the court system.

One solution is to set up a custodial account for your child. You are allowed to choose the custodian, and the custodian makes decisions regarding how the money is spent. Once your child turns 18, the money is your child’s to spend as he pleases.

As Stacy L. Bradford points out in her Wall Street Journal piece titled, “Deciding if Your Kid is Trust-Worthy”, a better alternative may be to set up a trust. A trust allows more control over how money is spent once the parents are gone. The parents can specify how the trust money is to be spent, for example on college tuition, and a trust can delay the age at which the child has access to the money, for example the child gets half at age 30 and the other half at 35.

The trustee makes all of the decisions, so it is important to pick a person who is trustworthy, financially astute and diligent.
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An individual takes on legal responsibilities when he agrees to be a trustee. If the trustee does not perform his duties properly, he could be personally liable.

A trust is a legal arrangement through which one person (or an institution, such as a bank or law firm), referred to as a trustee, holds legal title to the property of another person.

A trustee’s duties include locating and protecting trust assets, investing assets prudently, distributing assets to beneficiaries, keeping track of income and expenditures and filing tax returns. A trustee has a fiduciary duty to the beneficiaries of the trust, meaning that the trustee has an obligation to act in the best interest of the beneficiaries at all times. It also means the trustee will be held to a higher standard than if the trustee were dealing with his personal finances.

A trustee is entitled to hire an attorney and other professionals like an accountant to assist in the trust administration. The attorney, accountant and other professional fees are considered an expense of trust administration and are paid from the trust funds.
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