Law Offices of  David C. Slade

A Trust nearly always is a written document, variously called a "Trust Indenture, a "Declaration of Trust" or "Trust Agreement."   The person setting up the Trust is called the "Trustor."   The person(s) responsible for managing the property in the Trust is called the "Trustee," who manages the property for the benefit of another person, called the "Beneficiary."  It is not uncommon in a Living Trust for the same person to be all three at the same time: Trustor, Trustee and Beneficiary.  For example, in a typical Living Trust, as long as the Trustor is alive, he or she is also the Trustee and Beneficiary. On the death of the Trustor, a "Successor Trustee" (e.g., a trusted child or friend, perhaps a bank or trust institution) takes over as Trustee and follows the Trustor’s instructions, as set forth in the Trust, concerning the distribution of property and the payment of taxes and expenses.

Trusts can be either Revocable or Irrevocable.  A revocable Trust is one which can be amended or modified by the Trustor during the lifetime of the Trustor.  Living Trusts 9see below) are nearly always Revocable.  Irrevocable Trusts cannot be amended or modified, except in dire circumstances and under court review.  Some Trusts must be irrevocable in order to gain favorable tax advantages, such as Generation Skipping Trusts (see below).

A Trust can also be established in one's Will.  These are known as Testamentary Trusts (see below).  They operate the same much as any other Trust, except the Will establishing the Trust must go through probate, and the Testamentary Trust is irrevocable -- because the Trustor is now deceased.

Living Trusts.  A Living Trust is simply a trust you establish while you are living, and is a way for you to hold and manage your assets while you are alive and competent. It also provides for someone to step in and take over the management of your assets upon your mental or physical incapacity, or upon your death.  If your personal circumstances warrant, a Living Trust can be very valuable, but certainly are not necessary for everybody.   Establish a Living Trust if you want to:

• Avoid probate court, where your Will, upon your death, becomes a public document.  A Living Trust is not subject to court jurisdiction, and thus you can keep the contents and disposition of your Trust estate private
• Deal with real estate in another state.  If you own real estate in a State other than your residence, an "ancillary probate" will need to occur in the probate court of that State, slowing your probate process down and increasing costs.  A Living Trust avoids the need for any ancillary probate in the other State.
• Set up a mechanism to continue the administration of your assets for an extended period beyond your death, or determine in advance who will control your assets and what they will do if you become incapacitated
• Possibly lower or eliminate federal and state estate taxes.

Also, once you establish a Living Trust you must transfer title of your property that you want held by the Trust into the name of the Trust.  Bank accounts, real estate, personal property, heirlooms -- whatever you want in the Trust, must be titled in the name of the Trust, otherwise it will not be considered Trust property at the time of your death.  If that happens, your heirs will still have to go through the probate process in court.   As a precaution, you can also execute a simple Will to ensure that all assets remaining after debts are paid and gifts given, are turned over to the control of the trustee of the Living Trust.

When you establish your trust, you will name one or more successor trustees to take over when you no longer are able or desire to  manage the trust. Because one of the circumstances in which a        successor would take over is your incapacity, the Living Trust should clearly define incapacity. It is generally a good idea that your trust require two physicians to certify in writing that you are not competent to manage your financial affairs. By having a successor trustee to take over financial management of your assets, you generally eliminate the time and cost of going to the court to have a conservator appointed for your estate.
 
Special Needs Trusts.  If a member of your family is dependent on you and will never be able to take care of themselves, a major concern is how will they survive when you are no longer here to care for them. One way to do this is to set up a special needs trust which is funded at your death with existing assets or the proceeds from insurance policies. The trust would then use those funds to care for the individual but would avoid making them ineligible for any governmental benefits to which they might otherwise be entitled.

Life Insurance Trusts.  Having a life insurance policy can be a very good way to get funds to your beneficiaries, pay for your funeral, or pay any estate taxes that might become due on your death.  If, however, the policy is owned by you at the time of your death, the IRS will include the value of the Life Insurance policy in your estate for tax purposes even though the cash actually goes to a beneficiary. To avoid this problem, an irrevocable life insurance trust can be established. The trust would own the policy, not you. If making annual gifts is part of your estate planning, the gift to the Life Insurance Trust could be used to pay the premiums of the policy. When you die the trust gets the cash to the beneficiaries without creating any tax liability to your estate, giving them the full amount to pay for your funeral, pay taxes due on your estate, or simply for their own use. Using this type of trust requires you to give up all subsequent control of the Life Insurance, but can be very advantageous.
Generation Skipping Trusts.  These are carefully drafted, irrevocable trusts, usually set up by those with assets well above the federal estate tax limit ($750,000 in 2002), with a beneficiary at least two-generations away from the Trustor.   The typical situation is for a Grandparent, desiring to decrease their own taxable estate, sets up a Generation Skipping Trust for each of their grand-children or great-grandchildren.  The grandparent's children generation are "skipped" over.  Taxes are eventually paid, but usually not until distributions are made to, or for the benefit of, the beneficiary grandchild.

Testamentary Trusts.  These are trusts that are established in one's Will.  For example, a new parent prepares a Will, and would like to leave a testamentary gift to his or her new borne child, say enough money for college tuition.  The new parent certainly hopes to live until the child is 18, but if not, the Will can respond to that contingency by establishing a Trust for the benefit of the child -- if the child has not yet reached the age of 18 at the time of death of the parent.  Thus, if the parent dies when the child is 2, the Trust would be established through the probate of the Will, and the testamentary gift would be placed in Trust until the child turns 18 -- and goes to college.  All or some of the college tuition is thus ensured.