Why Could Trusts Be Important To You and Your Family Living in Boise?
Today trusts are for more than just managing the financial implications of incapacity, death, divorce, creditors, lack of experience in managing assets, or taxes. They can provide a valuable framework for planning for your, your spouse, your children's, and even friends' and partner's futures, forge generations of family unity, and be an instrument for teaching the next generation about family values, philanthropy and responsibility. In Idaho, trusts can even be established for the purpose of caring for pets.
Both state and federal laws govern trusts. Depending on your reasons for creating one, some state's laws are better than others and it is not required that you choose the law of the state in which you live to govern your trust's administration. Also, state trust laws can change over time as can Federal laws and regulations. If not properly drafted, a trust you create might not provide the results that you wish or be taxed differently than expected.
What is a Trust?
In a strictly legal sense, a trust is a contractual arrangement, usually among three types of parties: (1) the person or persons creating the trust (called the "grantor", "grantors", settlor", or settlors"); (2) the trustee or trustees; and (3) the beneficiary or beneficiaries. When someone owns something outright, that person generally has the right to both control and enjoy it. When a trust owns something, the right to control the asset is separated from the right to enjoy it. Trustees have the duty to control and mange the assets of the trust and the beneficiaries have the right to enjoy the assets in the manner specified by the trust document.
Despite this separation, under Idaho's and a number of states' law today, trustees and beneficiaries can, in fact, participate together in making some key decisions about how the trust operates and invests its assets. This is an exciting development in an area of the law that has been viewed as staid, only for very wealthy people, and requiring some bank or institution to be at least one of the trustees to ensure continuity of the trust's life.
A trust document is a set of instructions framing the relationship between trustees and beneficiaries or between trustees and pets being cared for under a "Pet Trust". It sets forth the duties of the trustee to manage the assets for the benefit of the beneficiary and the extent to which, and under what circumstances, the beneficiary can receive and thus enjoy the benefits of the property as well as make some decisions about the operation of the trust, the choice of trustees, and the management of trust property.
Common Types of Trusts
Trusts are always tailored to the objectives of each grantor or settlor and therefore are highly customized. However certain types of trusts that are often formed are:
Revocable, and Living Trusts ( also called "Living Trusts"):
These are formed by an individual or by a husband and wife (the "Grantors") who transfer some or all of their property to the trust. During their lifetime, the Grantor(s) are usually the trustee/s and the beneficiary/ies. While the Grantor or Grantors are still alive, the trust can be modified or even terminated at will. These trusts provide no asset protection or tax benefits during life. And in fact, all the income and capital gains generated by the property in the trust is reportable on the individual income tax returns of the Grantors. However, the reasons people create such trusts are first, they can be structured to ensure that the assets in the trust are applied to the care of the Grantors in the event of serious illness or incapacity. Second, as trusts are private affairs, they can state how the property in the trust will be divided at the death of each Grantor thus avoiding the need for public probate.
People can create these trusts so that they begin their existence during their lifetime or as part of their will or their revocable living trust. The beneficiary is always the other spouse who must have the right to receive all of the net income each year and also can, although it is not required, have a right to distributions of the property in the trust. There is an unlimited exception from Federal gift and estate tax, for any transfers of property between spouses during life or at death, Properly structured, a Marital Trust qualifies for this exemption, however, at the death of the beneficiary spouse, the remaining property is included in that person's estate. Therefore Marital Trusts do not permit the estate tax to be escaped. It only permits the tax to be deferred. People generally form these trusts when they wish to be assured that if the beneficiary spouse does not use all of the assets in the trust, they can name who (including even another trust) will receive the property remaining in the trust at the beneficiary spouse's death. These trusts are particularly useful in second marriages.
Credit Shelter Trusts (also commonly called "Exemption Trusts", "Children's' Trusts", or "Family Trusts"):
People commonly form these trusts for a number of reasons such as to (1) combine all assets that are forever exempt, at the time the trust is formed and funded, from the Federal estate tax and the generation skipping tax (the exemption for both in 2011 is $5,000,000) to ensure that their family and succeeding generations can enjoy the benefits of the assets without being taxed on distributions from the trust; (2) protect the assets from the creditors of the beneficiaries; (3) provide centralized professional management of businesses, investment portfolios and other assets. And (4) provide a framework to encourage the continuation of family cohesiveness and values. We typically see, with respect to trusts created upon death, spouses naming each other as the primary beneficiary of their respective trusts and the children or a trust for children as the successor beneficiaries. This permits a surviving spouse to have access to the income and principal during his or her lifetime while at the same time preserving the exemption from Federal estate tax regarding future distributions to children and their issue from the assets remaining at the death of the surviving spouse. Note that often both a Marital Trust and an Exemption Trust is created as part of a revocable living trust to preserve the privacy of a person's decisions regarding how property should be divided at death.
Special Needs Trusts ("SNTs"):
These trusts are established for the purpose of providing for certain supplemental, quality of life-enhancing
expenses of a beneficiary who is currently or may potentially become disabled or mentally ill. Properly established, these trusts can preserve a beneficiary's qualification for certain governmental benefits such as Medicaid requiring that the beneficiary have few assets and little income. There are several different types of special needs trusts including first party SNTs (established from assets of the beneficiary, e.g., from a personal injury settlement or inheritance), third party SNTs (established by someone other than the beneficiary) and pooled SNTs (established by an organization for a class of beneficiaries).
There are also a multitude of other types of trusts with such names as:
- Irrevocable Life Insurance Trust (also called ILITs)
- Spendthrift Trust
- Intentionally Defective Grantor Trust
- Charitable Remainder Trust
- Charitable Lead Trust
- Qualified Personal Residence Trust
- Dynasty Trust
- Asset Protection Trust
- Pet Trust
How Can We Help You?
The design of trusts to ensure that your goals are achieved, and choice of the right trustee or trustees to guide the trust, requires consideration of a multitude of issues including family dynamics and objectives, regulations and taxes. Mathieu, Ranum & Allaire have extensive experience in designing and administering trusts for gift, charitable, and estate plans. Please contact us should you like to discuss this valuable and flexible legal tool and how it might facilitate your goals.