Primer in trusts

Abstract

Trusts are common but complex estate planning tools. Oliver Wendell Holmes said, Don't put your trust in money; put your money in In estate planning, most individuals try to minimize the taxes on their estates and control how their property will be distributed at death. These seemingly straightforward objectives are complicated by federal estate and gift tax laws and applicable state tax and nontax laws. Creative use of trusts as part of a comprehensive estate plan can help ensure * Property is transferred according to an individual's wishes. * Probate headaches are avoided. * Federal and state tax burdens are minimized. This, article examines the use of trusts in estate planning. Although a comprehensive discussion of estate and gift tax provisions is beyond the article's scope, brief explanations are included when appropriate and a glossary of relevant trust terms appears on page 60. TRUSTS A trust is a legal entity established by a person (known as the grantor, settlor, testator or trustor) either while living or through a will at death. The grantor transfers legal title to property, known as the trust corpus or principal, to the trustee, who manages the corpus for the benefit of named beneficiaries. The trustee also distributes income and corpus according to the instructions in the trust instrument or, in the absence of instructions, according to state law. Trusts offer planning flexibility. Grantors generally can design trusts to meet specific planning objectives, limited only by the restrictions of applicable state law and the practical considerations of federal and state tax laws. Trusts have a price. Besides the legal costs of establishing trusts, there generally are trustee fees, accounting and record-keeping costs and expenses of filing annual income tax returns. Noncompliance with federal and state laws in creating or operating trusts can be costly, resulting in an unexpected tax bite or failure to satisfy the grantor's objectives. USES OF TRUSTS IN ESTATE PLANNING Trusts can be valuable when planning for death taxes, probate administration, continued control of property or some combination of all three. Death tax planning. Federal estate tax and state estate or inheritance taxes generally are imposed only on property in which an individual holds an interest at death. Transferring property to an irrevocable living trust in which the grantor surrenders all ownership interests excludes the corpus from the grantor's taxable estate. A transfer to a revocable trust does not produce the same result because the grantor is able, until his or her death, to reclaim the corpus or terminate the trust; the actual corpus transfer is deemed to occur at death. The transfer of property to a trust is considered a gift under most estate and gift tax laws. Any death tax savings should be evaluated in light of potential gift tax liability when the property is transferred to the trust. Probate estate planning. For probate purposes, property transferred to a living trust - revocable or irrevocable - is not considered owned by the grantor at death. The corpus passes to the beneficiary under the terms of the applicable trust instrument rather than by will or state intestate succession laws. This normally facilitates the transfer of ownership and reduces associated court costs and legal fees. Planning for continued control. A trust may be structured so the grantor retains some degree of control over the corpus. Some common situations in which trusts are used to fulfill this control objective are described in the checklist on page 61. Because satisfying one estate planning objective may compromise another, trusts must be designed carefully to ensure the grantor's objectives are met. For example, George Roberts transfers an apartment building to a revocable living trust, the income from which is paid to his niece. …