Trusts in Financial and Gift Planning

The many benefits of trusts

Trusts often produce welcome benefits in estate and gift planning. Different types of trusts are designed to:

  • Help individuals provide added security for family members and other loved ones.
  • Reduce probate expenses.
  • Minimize taxes.
  • Control the use and disposition of property for many years into the future—even after death.

Charitable trusts also provide an opportunity to make major gifts without compromising personal income or family financial security.

What is a trust?

A trust is an agreement between an individual (the “grantor”) and a trustee. The grantor creates the trust and transfers legal ownership of specific property to the trustee, who then invests the property and disposes of it according to the terms of the trust agreement.

The trust agreement is a blueprint for the management, investment, and use of the trust property. Each trust agreement is drafted by an attorney to accomplish the grantor’s specific goals by:

  • Defining how the trustee is to invest the property.
  • Providing directions for the payment or accumulation of income earned by the trust.
  • Naming one or more immediate beneficiaries and defining individual benefits and rights.
  • Directing how long the trust will last and how the trust property will be distributed when the trust term ends.
  • Defining the rights of all beneficiaries and the powers and obligations of the trustee.
  • Defining the grantor’s rights (if any) to change or modify the agreement, receive income or other distributions, change the trustee, etc.

Taking the time to plan and draft the trust agreement, choosing the right person to serve as trustee, and providing flexibility to meet changing circumstances are critical to a successful trust.

A revocable living trust

With the exception of the timing of its creation, a revocable living trust offers virtually the same advantages as a trust set up in your will—it lets you control the disposition of your assets after death. In addition, because you create the trust during life, it can also help you manage your affairs during life and provide other features that may make it an attractive estate planning strategy.

Typically, you can change a revocable living trust at any time during life. You can:

  • Receive all trust income for life.
  • Add or remove property from the trust.
  • Modify or cancel the trust arrangement at any time.

However, at death, the trust becomes an irrevocable plan for managing and disposing of your assets.

Let’s look at an example that illustrates why the revocable living trust is a popular planning tool.*

An example

Let’s look at an example that illustrates why the revocable living trust is a popular planning tool.*

Bob works with an attorney to develop a comprehensive plan for the disposition of his estate. His major concern is to provide financial security for his wife, Anne. To accomplish this, he creates a revocable living trust. The trust agreement provides that after his death, Anne will receive all trust income for as long as she lives. In addition, the trustee will pay out as much principal as Anne needs for her health, support and maintenance. The agreement also authorizes the trustee to:

  • Handle Anne’s financial affairs in the event of her illness or incapacity.
  • Pay certain amounts from the principal to any of Bob’s children to meet emergency financial needs.

At Anne’s death, the trust property will be divided equally among the children.

Bob transfers most of his investments and other assets to the trust, and names the trust as beneficiary of his life insurance and retirement plan benefits.

It is important to note that even though Bob’s assets are held in the trust, Bob is in full control. In fact, Bob could have served as the trustee himself (with a named successor to take over in the event of his death or incapacity), but it is not necessary for control, as he reserves the right to change the trust terms or cancel it entirely if he wishes.

Bob has several reasons for creating a revocable living trust instead of establishing a trust in his will. He wants to:

  1. Minimize probate costs. Property transferred to the trust during life is not usually part of the probate estate, which often results in substantial savings.
  2. Ensure immediate availability of property. Property passing through probate can be tied up for months or even years, but trust property remains productive and is immediately available for distribution under the trust terms.
  3. Avoid public scrutiny of the estate. While a will becomes a matter of public record during probate, a trust agreement is private and not available for public examination.
  4. Delegate day-to-day investment and management responsibilities. The professional trustee will continue to prudently handle all trust property in the event of Bob’s death, disability or incompetence.