Different Types of Trusts

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This entry will focus on the different types of trusts; their advantages, disadvantages and unique qualities/purposes.

 Testamentary Trusts
o A testamentary trust is created by a will. The will itself contains language that creates the trust and since a will does not become effective until death, the trust does not exist until death;
o Testamentary trusts are distinguished from inter vivos trusts which are created during the settlor's lifetime;
o In practical terms, testamentary trusts tend to be driven more by the needs of the beneficiaries (particularly infant beneficiaries) than by tax considerations, which are the usual considerations in inter vivos trusts;
o A testamentary trust provides a way for assets devolving to minor children to be protected until the children are capable of fending for themselves;
o The trustee is required to meet with the probate court regularly and prove that the trust is being handled in a responsible manner and in strict accordance with provisions of the will which created the trust;
o The trustee must be prepared to oversee the trust for its duration, which involves a considerable commitment in time, possible emotional attachment, and legal liability.

 Living Trusts
o A living trust is created during a person's lifetime to either save money on taxes or set up long term property management;
o With a living trust, your assets (your home, bank accounts and stocks, for example) are put into the trust, administered for your benefit during your lifetime, and then transferred to your beneficiaries when you die;
o Most people name themselves as the trustee in charge of managing their trust's assets. This way, even though your assets have been put into the trust, you can remain in control of your assets during your lifetime. You can also name a successor trustee (a person or an institution) who will manage the trust's assets if you ever become unable or unwilling to do so yourself.
o Young married couples without significant assets and without children, who intend to leave their assets to each other when the first one of them dies do not need a living trust and would not benefit from having a living trust. Other persons who do not have significant assets and have very simple estate plans also do not need a living trust;
o Because living trusts are not under direct court supervision, a trustee who does not act in your best interests may, in some cases, be able to take advantage of you;
o Living trusts are often used because they may allow assets to be passed to heirs without going through the process of probate. Avoiding probate will normally save substantial costs, time, and maintain privacy.

 Life Insurance Trusts
o A life insurance trust is an irrevocable, non-amendable trust which is both the owner and beneficiary of one or more life insurance policies;
o If the insured is the owner of the policy, the proceeds of the policy will be subject to estate tax when she dies; however, if she transfers ownership to a life insurance trust, the proceeds will be completely free of estate tax;
o The insured cannot serve as trustee of the life insurance trust. That means that he will have to find or hire a third party trustee. However, many banks and trust companies offer reduced fees for life insurance trusts because they involve essentially no investing decisions;
o Upon the death of the insured, the Trustee invests the insurance proceeds and administers the trust for one or more beneficiaries;
o Insurance trusts may be funded or nonfunded. A funded life insurance trust owns both one or more insurance contracts and income producing assets. The income from the assets is used to pay some or all of the premiums. Funded insurance trusts are not commonly used;
o Many people find that the tax saving potential of a life insurance trust is worth the cost and hassle. It allows you to remove from your estate a significant asset that you are unlikely to want access to during your life. And it ensures that the life insurance proceeds go 100% to the beneficiaries, not the federal government.

 Special Needs Trusts (Supplemental Needs Trust)
o A special needs trust is created to ensure that beneficiaries who are disabled or mentally ill can enjoy the use of property (assets) which is intended to be held for their benefit;
o A special needs trust provides for the needs of a disabled person without disqualifying him or her from benefits received from government programs such as Social Security and Medicaid;
o A Supplemental Needs Trust provides for supplemental and extra care over and above that which the government provides;
o According to Congress a Supplemental Needs Trust must be irrevocable. A properly-drafted Trust will include provisions for Trust termination or dissolution under certain circumstances, and will include explicit directions for amendment when necessary;
o This type of trust can be established at any time before the beneficiary’s 65th birthday. It is very common to create a Special Needs Trust early in a child’s life as a long term means for holding assets to benefit the disabled family member;
o A special needs trust can be funded through a will or gifts from relatives and friends made directly to the trust instead of to the disabled child. Many special needs trusts are funded through "survivorship" or "second-to-die" life insurance policies that cover both parents and pay out on the death of the second parent.

 Charitable Remainder Trusts
o It's an irrevocable trust designed to convert an investor's highly appreciated assets into a lifetime income stream without generating estate and capital gains taxes;
o Charitable trusts are a handy tax-saving tool. But they can also greatly benefit a charity of your choice;
o Usually cash or readily marketable securities, including bonds are the types of assets commonly used to establish a CRT. But real estate, works of art and other assets may be deemed acceptable. The marketability of the asset is a prime consideration in funding a charitable remainder trust. Establishing a CRT may be especially advantageous if you have assets, like low-dividend stocks, that have been generating little or no income;
o The disadvantage is that the assets are permanently tied up or committed;
o There are two kinds of CRTs: the charitable remainder unitrust provides variable income; the charitable remainder annuity trust provides fixed income;
o Anyone who is subject to paying capital gain taxes on appreciated assets, whose estate is subject to estate taxes, would like to benefit charity, and has a need for income is a candidate to benefit greatly from a CRT.

 Dynasty Trusts
o A dynasty trust is an estate-planning tool that provides income and support to children and future generations of your family. Instead of wealth passing directly to your children, the assets reside in the trust, which helps protect them from estate taxes, the consequences of divorce, creditors and uncontrolled spending, while remaining in the family for generations;
o Most dynasty trusts are typically structured to continue in existence for the maximum period of time permitted under the applicable state law in which the trust is located;
o Dynasty trusts should only be funded with certain types of assets;
o The trust's assets are valued at the amount they were worth when the trust was created as long as they stay in the trust. Any appreciation generally is exempt from estate taxes;
o The trust's structure can be as flexible as possible to protect the grantor and beneficiaries from the unknown;
o This type of trust protects future generations against uncertainties and provides a variable income for them, stretching out such payments as long as legally possible.

For more information on a particular type of trust, our helpful and capable staff invites you to contact us today to schedule an informative, 30 minute free, initial consultation with an estate planning attorney.

PLEASE LOOK FORWARD TO OUR NEXT BLOG POSTING SCHEDULED FOR TUESDAY, MARCH 30, 2010 REGARDING THE POWER OF ATTORNEY DOCUMENT.