By: Matthew C. Zuengler, Attorney at Hager, Dewick & Zuengler, S.C.
The use of trusts is becoming more common for various purposes. Most recently, much has been made of President Trump contributing assets to a “blind” trust, as a means to avoid conflicts of interest with respect to his decisions and orders and the impact that these orders and decisions have on his assets. The following will provide an overview as to what a trust is, what a trust seeks to accomplish and common types of trust arrangements.
What is a Trust?
At the most basic level, a trust is an arrangement that spells out the rules to be followed for assets held for someone’s benefit. While trusts may be designed in any number of ways, there are some key elements present in each trust arrangement.
There are three parties to the arrangement:
- The Grantor, who is the person who creates the trust and provides instruction as to how the trust arrangement is to operate.
- The Trustee, who is the person who is responsible for managing the trust assets and carrying out the term of the trust.
- The Beneficiary or beneficiaries, who are the people who benefit from the trust.
Trusts may be created to be effective during lifetime or at death. A lifetime trust may be irrevocable or revocable by the Grantor. The revocability of the trust will depend on what is sought to be accomplished by the trust.
What does a Trust seek to Accomplish?
The purpose of having a trust is to achieve a specific goal or goals. With the desired objectives identified, the Grantor can structure the language of the trust to address these goals.
Some of the specific goals include the following:
- Limit Access to Funds. A trust can limit a beneficiary’s access to funds by providing for distributions at certain ages and/or under specified terms (e.g., distributions may be made for health, education, support or maintenance). This type of trust is commonly structured as a Testamentary Trust and is typically created for a minor or relatively young beneficiary and may be included in someone’s Last Will and Testament or Revocable Trust.
- Avoid Probate. A Revocable Trust or Living Trust can be created and funded to manage assets during lifetime and following death. The Grantor retains the right to revoke or modify the trust at any time. Following the Grantor’s death, the trust provides for the disposition of assets based on the instructions outlined by the Grantor. These instructions may include ongoing trusts for beneficiaries, similar to those discussed above. The funded Revocable Trust allows for the transfer of assets to beneficiaries on a private basis, as no inventory or records need to be filed with the Register in Probate.
- Address Second Marriage Situations. In situations where an individual has children from a prior marriage or relationship, often an objective is to provide for a surviving spouse, yet ultimately have any remaining assets pass to children. If assets are left outright to the surviving spouse, these may be consumed or redirected to someone other than the Grantor’s children. A marital trust, known as a QTIP Trust, can be used to provide for distributions to the surviving spouse, yet ultimately have the remaining assets pass to children upon the surviving spouse’s death.
- Minimize Gift and Estate Taxes. To the extent someone has a sizable estate and is concerned about estate taxes, trusts can be structured to make use of a Grantor’s Federal Estate and Gift Tax Applicable Exclusion Amount (currently $5,490,000 per person). This can take the form of a Credit Shelter or Family Trust created at death or, in some cases, a lifetime irrevocable trust to receive gifts of assets during lifetime.
- Provide for Divorce or Asset Protection. Rather than giving assets outright to a beneficiary, if assets are left in trust for the benefit of a beneficiary, a beneficiary does not “own” these assets and, therefore, a divorcing spouse or a creditor of such beneficiary cannot reach the assets held in trust.
While a trust arrangement is relatively straightforward, considerable flexibly exists in structuring the provisions of a trust. When done correctly, trusts can be useful mechanisms to provide for an ongoing legacy to ensure that a Grantor’s objectives are fulfilled.