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Using Trusts in Estate Planning
This blog explains the basic principles of trusts and the reasons for creating them. It explains different trusts and their characteristics. It also covers estate planning objectives that can be achieved through trusts, and the potential advantages and disadvantages.

What Is a Trust?

The word trust is used in a variety of ways. In its broadest sense, the word signifies a confidence that one person places in another. For estate planning, a trust is a legal relationship between two persons regarding property to benefit third person. The person who holds legal title to the property – called the trustee – must deal with the property to benefit another person – the beneficiary – under rules set by the creator of the trust – the grantor.

Trusts are unique to countries with laws based on English common law, like ours. Some historians trace trusts back to decisions of English judges in the days of the Crusades, while others trace the idea further back to Roman law. Regardless of their beginning, trusts have been a fixed part of American law since our country began. Even the IRS accepts them and has adopted rules by which taxpayers may feel secure knowing certain trusts terms will cause a certain tax result.

With a trust, the grantor divides ownership of trust property between the trustee, with legal title to the trust assets, and the beneficiary, who has the ultimate right to have the property. Once property is transferred to a trust, the trustee is its legal owner. The trustee has no personal rights in the property, unless he or she is also a beneficiary; the trustee must manage the trust property to benefit the beneficiaries, investing its assets and distributing them to the beneficiaries according to the grantor’s written instructions. The law holds a trustee to a high standard for how he or she manages trust property. With some trusts the grantor can be both the trustee and a beneficiary.

Depending on the trust, the grantor’s rights in the property may end after the creation and funding of the trust. But the trust agreement might give the grantor continuing authority, such as the right to name successor trustees, or to end the trust. If a trust is revocable – capable of being cancelled or changed by the grantor –, the grantor can amend or revoke the trust. Conversely, with an irrevocable trust – capable of being cancelled or changed by the grantor –, the settlor has little authority to influence trust administration. Although with some trusts the grantor can be the trustee, it is normally not recommended for irrevocable trusts.

Beneficiaries have the right to information about the trust and to periodic reports on the status of the trust’s properties. Unless also serving as a trustee, a beneficiary has no power over how trust property is managed, except to sue a trustee not properly managing the trust.

Reasons for Creating a Trust

A trust can be used for many reasons, some of which are:

Probate Avoidance | One of the most obvious advantages of a trust is that trust assets avoid probate and are distributed according to the trust, not a will. This is because when a trust grantor dies leaving all his property to his trust, he or she has no property to probate. This avoids not only the cost but also the delay of probate. However, in Utah the probate process is not always burdensome; usually it is usually simple

Creditor Protection | With an irrevocable trust, because the assets have been permanently transferred away from the grantor’s control, the grantor’s creditors cannot take those assets, so long as the grantor has no right to distributions.

Beneficiary Protection | A special clause – called a spendthrift clause – is often a trust term a grantor includes in the document that creates the trust. It protects beneficiaries who cannot manage their money

Financial Asset Management | Sometimes beneficiaries do not have the time, experience, willingness, or ability to actively manage trust property. A grantor can appoint a trustee with the right background to manage trust assets. One common fiduciary requirement of a trust is the duty of prudent administration, which requires the trustee to invest and manage trust assets as a prudent person would.

Flexibility | Trusts are flexible estate planning tools. They can provide for an array of contingencies and, by giving the trustee careful instructions in the trust document, the trustee can react to future events when distributing principal and income when the needs of beneficiaries change. And revocable trusts are usually easy to amend and revoke.

Lifetime Gifts | A trust can give gifts to beneficiaries without giving them the right to immediate possession of the assets. With a trust, the grantor can specify when and under what circumstances distributions of income and principal will be made to a beneficiary.

Tax Benefits | Assets put into a properly structured irrevocable trust, may avoid or minimize estate and gift taxes.

Privacy | A will becomes a public record once filed in a probate court. This is because a will is available for the public to access and review. Even for a probate without a will – an intestate probate – court records are public records. Unless court intervention is required at some point, a trust may never be made public.

How to Create a Trust

The primary method to create at trust is by a will or other written document.

Disadvantages of a Trust

Title Problems | While property with title documentation, such as real estate, is easily transferred to a trust by deed, some property, like expensive jewelry or artwork, may not be transferred as easily.

Creation and Management Expense | A trust is generally more expensive to create than a will. A trust must be funded at – or soon after – the time it is created. Also, if a trustee is a bank or trust company, it must be compensated.

Updates Based on Changed Circumstances | Like a will, a trust may need to be changed due to changed circumstances, such as a subsequent divorce, marriage, or the birth of a child.

vocable Trusts Not Shielded from Creditors | A revocable trust gives the grantor more control over his or her trust property but does not shield that property from the grantor’s creditors. An irrevocable trust may provide protection against creditors, but that protection comes at the cost of the grantor’s loss of control over trust property.

Tax Savings

Because the IRS recognizes trusts as fixtures of American law, trusts can help save taxes. A trust for married individuals – a marital trust – can be especially helpful for married couples to save current and future taxes.

Marital Trusts | Marital trusts take advantage of two tax laws: (1) the unlimited marital deduction, and (2) the individual estate tax credit, which – in 2021 – is approximately $5.4 million.

  • Marital deduction: under the marital deduction, transfers of property between spouses are free from tax. This tax-free amount is unlimited. But the marital deduction is not a permanent exclusion from gift or estate taxes. Although property passing to a surviving spouse is not taxed at the death of the first spouse, it is included in the taxable estate of the surviving spouse.
  • Individual estate tax credit: under the individual estate tax credit, property owned by a deceased individual – in 2012, under $5.4 million – is also free from tax

When one spouse dies without a marital trust, the other spouse pays no tax on property inherited from the deceased spouse. But when the second spouse dies, what is left of property inherited from the deceased spouse will be taxed. This is because when the second spouse dies with an estate worth more than the individual exemption amount, his or her estate may be subject to tax on the amount exceeding the exemption. Meanwhile, the first spouse’s estate tax credit was unused and wasted.

A marital trust shields much, as much as possible, both spouse’s estates from federal estate taxes.

Special Needs Trusts | Another important tax saving trust is a Special Needs Trust.

A special needs trusts benefits a person with a disability who cannot manage his or her own affairs. The trust focuses on managing the trust funds to make sure the disabled beneficiary is adequately and appropriately cared for throughout his or her lifetime. This can also include providing for activities which enrich the life of the disabled beneficiary. The situations for which such a trust might be used include:

  • parents planning for a disabled child;
  • spouse planning for a disabled spouse, or
  • disabled individual inheriting money or receiving proceeds from a personal injury claim

Typically, an individual creates the trust to safeguard the personal savings or inheritance of the beneficiary while maintaining his or her eligibility for public benefits. The trust will usually include terms authorizing distributions for services and activities of daily life not covered by public benefits.

Spendthrift Trusts | A spendthrift trust protects beneficiaries who cannot manage their money. The trustee typically has the authority to determine what payments are necessary according to the trust agreement. The terms of such a trust may state, for example, that the beneficiary may only receive income earned from trust property and may not access the principal. Or the trust may empower the trustee to pay the beneficiary’s expenses rather than paying him or her income from the trust.

Even if not actually Spendthrift Trusts, many trust documents establishing other types of trusts contain terms that impose spendthrift precautions on trustees and beneficiaries.

While a spendthrift trust or clause will insulate trust property from claims by a beneficiary’s creditors, once the trustee has distributed money or property to the beneficiary, the creditor can then pursue a claim against the beneficiary individually. However, trust terms may allow a trustee to withhold payments to beneficiaries while the beneficiary is under threat of creditors.

Life Insurance Trusts | The IRS considers the proceeds of a life insurance policy part of the insured’s estate if the insured had any “incident of ownership” in the policy at the time of death. Incidents of ownership include, among others, the power to change the beneficiary. So proceeds from most life insurance policies become part of the decedent’s taxable estate.

A life insurance trust removes life insurance from one’s estate.

I hope this short summary of various trusts help you understand better the role trusts can play in planning one’s estate.
–Robert A. Youngberg

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