What is a Trust? Ownership of any asset normally includes the right to control it and the right to benefit from it.

Transcription

1 What is a Trust? Ownership of any asset normally includes the right to control it and the right to benefit from it. A trust splits ownership of its assets: Legal ownership Equitable ownership The purpose of a trust is to hold assets for the ultimate benefit of a person or class of people without giving the beneficiary immediate access to the trust assets.

2 Grantor Parties to a Trust Establishes the trust but retains no interest in the trust assets Trustee Holds legal title to the trust assets Wields control over the assets and is responsible for them Beneficiary Ultimate beneficial owner of the trust assets Equitable owner of the trust assets

3 Identification of the parties Trust Formation Grantor, trustee and beneficiary Trust res One person can fill multiple roles Ex. The grantor can sometimes be the trustee and the trustee is often one of the beneficiaries Except that the beneficiary and trustee cannot be exactly the same or the trust merges and is extinguished Required for living trusts Though this can often be a nominal amount only Not applicable for testamentary trusts since the trust doesn t take effect until the testator dies Signatures of grantor and trustee Many states require witnesses or notarized signatures

4 Trust Agreement Most trusts are based on written agreements. It is almost never advisable to intentionally create an oral trust. However, an oral trust agreement is not inherently invalid. Ex. Bob gives $1,000 to Jane and says Please hold this for Joan. This is a trust arrangement. Without the writing, a court can still infer the existence of a trust for fairness or equitable reasons. These include: Constructive trusts Implied trust

5 Revocable Trusts Completely flexible and revocable by the grantor. Grantor can: Amend the trust Take money out of the trust Change the beneficiaries Revoke the whole trust Etc. Sometimes referred to as a will substitute It is comparable to a will in that it does little until the death of the grantor Grantor is often the initial trustee Backup trustees are named for the grantor s disability or after the grantor s death

6 Revocable Trusts - Advantages Probate Avoidance Problems associated with probate Delay in administration and distribution after death Legal fees in bringing the proceeding Public nature of the proceeding Court supervision Bond requirement Opportunity for interested parties to challenge a will Disability planning Since the trustee can take over if the grantor is disabled, there is no need to Bring a guardianship proceeding which is expensive and time consuming Rely on a power of attorney, which many banks may not respect

7 Revocable Trusts - Disadvantages Expense at time of formation, including: Legal fees Filing fees for deeds Hassle of funding the trust initially If the revocable trust is not funded with all or substantially all of the grantor s assets, you may have to bring a probate proceeding anyway, thus nullifying the main point of the trust! Sometimes lack of court supervision can be a bad thing, especially when there is a potential for abuse or disagreements among the heirs.

8 Irrevocable Trust The grantor may not revoke, amend, or modify the trust. The grantor may retain some control over the trust assets, however, depending on the purpose of the trust. Irrevocable Trusts are often used for one or more of the following purposes: Medicaid or other benefits eligibility planning Estate Tax Planning Creditor protection

9 Testamentary Trust This means a trust set up by a will. It takes effect upon the death of the testator Common Examples: Credit Shelter trust Marital trust Trust for benefit of minors All of these can be established by a trust (revocable or irrevocable) after the death of the grantor in addition to being established by a will.

10 Trusts that can hold S Corporation Stock The general rule is that only individuals can be shareholders of S Corp stock. Since a client may hold S Corporation shares, a trust that cannot hold these shares may be an incomplete estate planning tool. Trusts that can hold S Corporation stock include: Grantor trusts These trusts are treated as being entirely owned by the grantor for income tax purposes. Qualified Subchapter S Trust ( QSST ) Electing Small Business Trust ( ESBT )

11 Qualified Subchapter S Trust ( QSST ) Requirements for a trust to qualify as a QSST: There can be only one income beneficiary The income beneficiary must be a U.S. resident All income of the trust must be distributed to the income beneficiary at least annually Principal can only go to the one beneficiary Though the discretion as to whether to distribute can remain with the trustee The income interest must last until the trust termination or the beneficiary s death (whichever is earlier) The trust must file an election to be treated as an eligible S Corporation shareholder Income from a QSST is taxed as income to the beneficiary.

12 Electing Small Business Trust ( ESBT ) Similar to the QSST Advantages over the QSST The ESBT may have multiple beneficiaries. The income can be allocated by the trustee among multiple beneficiaries and it may be accumulated rather than distributed. Disadvantage Taxed at the highest marginal income tax rate for individuals. (39.6% as of 2013)