What is a trust?

If you give a neighbor $30 to buy groceries for you, you have created a trust. You are the Settlor or Grantor because you have "settled" property on the Trustee. Your neighbor is the Trustee because the neighbor has accepted possession of property for the benefit of another person, not for the Trustee's benefit. You are also the Beneficiary because Trust Corpus--the groceries--will be distributed by the Trustee to you. The Trust Agreement is the verbal promise of the Trustee to buy groceries for your benefit.

This simple oral agreement is just as much a trust as a 48-page trust drafted by two lawyers and a tax accountant. If`the trust agreement does not have specific provisions governing the parties' rights and obligations, many legal questions may be answered by tile law of trusts. For example: If the neighbor is robbed on the way to the store, who bears the loss of the money? If the neighbor doe not buy the right groceries, are you entitled to a refund? Can the neighbor demand compensation for the time and expenses of going to the store and shopping? For this simple trust, an oral agreement is probably sufficient. For estate planning, trusts must be more sophisticated.


What advantages does a trust have that a will does not?

The greatest advantage of a trust is that no court supervision is necessary. The successor Trustee does not need to go to court to take over responsibility for keeping the house payments and utility bills up-to-date. The Trustee can immediately disburse money to the custodian of minor children for groceries, medical expenses, tuition and other urgent needs. With only a will, there may he delays of several months before money is available.
Another major advantage is flexibility. You can direct your trustee to withhold your son's stipend unless he attends your alma mater and wears a bow tie to class. You make your daughter's distribution contingent on her marrying someone whose legal first name is "Bob." These examples are silly, but they demonstrate the range of possibilities. You might require the trustee to make weekly visits to your widow to ensure her safety and well-being.

The same provisions might be placed in a will, but the court's ability to supervise the trustee and enforce the terms of a testamentary trust are limited. The judge may strike terms that are found to be unenforceable or "silly."

A trust may avoid having a large portion of your estate paid to the government in income, estate, gift and other taxes. For example, if a surviving spouse has an estate of $4,000,000, there will be at least $780,800 in taxes to be paid. That tax may be avoided if the deceased spouse had set aside $2,000,000 in a "By-Pass Trust." Tax savings may also he accomplished with an "Irrevocable Life Insurance Trust."


How does a trust provide control after my death?

You set the terms by which payments are made to your beneficiaries. You cannot enforce orders to your beneficiaries, but you can require the Trustee to pay or withhold payment depending on what your beneficiary does. You should choose a Trustee in whom you have great confidence. In most cases, the Trustee is acting on his honor. On the other hand, the Beneficiaries can ask a court to remove the Trustee or order certain payments if the Trustee acts improperly. Either way, unless the Trustee and all Beneficiaries act together to break the Trust, they must dance to your music.


What are the disadvantages of a trust?

If lack of court supervision is the greatest advantage in some cases, lack of supervision is the greatest disadvantage in others. A dishonest Trustee -- or an honest but ineffectual Trustee -- can cause the loss of large sums before the Beneficiaries or others request court supervision.


Is it expensive to set up a trust?

"Expensive" is a relative term. Will a well-drafted estate plan with an inter-vivos trust cost more than an iPad? Probably. Will it cost as much as a new car? Certainly not.

Most attorneys have horror stories of botched estate plans. However, an estate plan with a trust can be botched as well as one without a trust. By setting up an estate plan with well-drafted trusts, it is possible to save hundreds of thousands of dollars, if the estate is that large. Even a very small estate generally saves much more than the cost of an estate plan in probate costs and attorney fees. More importantly, your Trustee will probably be someone who will miss you greatly. Setting up the estate to be administered as a Trust will save that person time and ease the stress of handling the estate. Being a Trustee is much less arduous than being the Personal Representative in a probate proceeding.


Who should have a trust?

The size of the estate should not be the first consideration. More important is the question whether there are minor children or disabled adults who will be dependent on the estate. Anyone who has a minor child or a disabled adult dependent should have a trust set up so that money will be available, but safely controlled in case of death or incapacity.

The most important reason for a single person to have a trust is so that the successor Trustee can step in if the person is incapacitated. It is a hardship to be hospitalized or in a convalescent home for several months. As bad as the hospitalization is, it is even worse if there is no home to return to. If there is a Trust, the Trustee can collect insurance benefits, keep the rent and utilities current and take other action to protect the property of the Grantor while the Grantor is away.

A third consideration is potential estate and gift tax. As stated elsewhere, the savings may be in the hundreds of thousands of dollars.

Not everyone needs a trust, obviously. However, most people who have some assets would be better served by a trust than by only a will. That is because a Trustee can react quickly to an emergency. Action may he delayed too long if authorization by a court is necessary.


What is a by-pass trust?

Assume that a couple has an estate of $4,000,000. Unless an individual makes taxable gifts before death, the first $2,000,000 in the decedent's estate will pass tax-free. If the estate of the first to die passes to the surviving spouse, that spouse will have an estate of $4,000,000. On the death of the surviving spouse the estate tax will be $780,800. The tax can be avoided if the $4,000,000 owned by both spouses is divided for tax purposes into two $2,000,000 estates. A by-pass trust is one way of accomplishing this.


If an individual's estate exceeds the allowable tax-free estate, or if a couple's estate exceeds two times that amount, a more sophisticated estate plan should be considered. For example, a life insurance trust can be set up to pay the estate tax, or to pass hundreds of thousands of dollars tax-free. Other possibilities include charitable trusts, family limited liability companies, and generation-skipping transfers.

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