A revocable trust can be changed or terminated by the trustor during his lifetime. An irrevocable trust , as the name implies, is one the trustor cannot change once it's established, or one that becomes irrevocable upon his death. Living trusts can be revocable or irrevocable. Testamentary trusts can only be irrevocable. An irrevocable trust is usually more desirable. The fact that it is unalterable, containing assets that have been permanently moved out of the trustor's possession, is what allows estate taxes to be minimized or avoided altogether.
A funded trust has assets put into it by the trustor during his lifetime. An unfunded trust consists only of the trust agreement with no funding. Since an unfunded trust exposes assets to many of the perils a trust is designed to avoid, ensuring proper funding is important.
The trust fund is an ancient instrument — dating back to feudal times, in fact — that is sometimes greeted with scorn, due to its association with the idle rich as in the pejorative "trust fund baby".
But trusts are highly versatile vehicles that can protect assets and direct them into the right hands in the present and in the future, long after the original asset owner's death. A trust is a legal entity employed to hold property, so the assets are generally safer than they would be with a family member.
Even a relative with the best of intentions could face a lawsuit, divorce or other misfortune, putting those assets at risk. Though they seem geared primarily toward high net worth individuals and families, since they can be expensive to establish and maintain, those of more middle-class means may also find them useful — in ensuring care for a physically or mentally disabled dependent, for example.
Some individuals use trusts simply for privacy. The terms of a will may be public in some jurisdictions. The same conditions of a will may apply through a trust, and individuals who don't want their wills publicly posted opt for trusts instead.
Trusts can also be used for estate planning. Typically, the assets of a deceased individual are passed to the spouse and then equally divided to the surviving children. However, children who are under the legal age of 18 need to have trustees.
The trustees only have control over the assets until the children reach adulthood. Trusts can also be used for tax planning. In some cases, the tax consequences provided by using trusts are lower compared to other alternatives. As such, the usage of trusts has become a staple in tax planning for individuals and corporations.
Assets in a trust benefit from a step-up in basis , which can mean a substantial tax savings for the heirs who eventually inherit from the trust. Note that the step-up in basis applies to inherited assets in general, not just those that involve a trust. Finally, a person may create a trust to qualify for Medicaid and still preserve at least a portion of their wealth.
This is why some choose a professional trustee to work alongside a trusted friend or relative. A trust may provide for a degree of asset protection and a shield from future creditors. This is a very technical issue, and the trustee should have a serious consultation with an experienced attorney in these areas of law.
Dynasty trusts can be set up to last past the lives of children and grandchildren, and even those yet to be born.
Trustees need to be aware of these features and should take care to follow the rules that might come from having these trusts. Often a client will ask his accountant to serve as a trustee. Some of the following issues are specific to CPAs, but many also apply to anyone serving as a trustee. First, consider liability risk and whether professional liability insurance covers this; there is always a risk of being sued, not necessarily because of any wrongdoing.
A beneficiary may disagree with the actual distribution allotted in the trust document compared to what others received. Others may question whether the accountant is thoroughly familiar with the duties of a trustee or is prepared to deal with each set of beneficiaries as a group and individually to respond to their questions and concerns. Questions may arise about the amount and frequency of compensation for serving as trustee, as well as whether there are multiple trustees and the payment will need to be shared.
Friction with beneficiaries may arise when distributions are at the option of the trustee and are delayed or withheld, or made in an unequal manner based on requirements of need as stated in the trust document. Finally, prospective trustees should gauge their availability to meet with beneficiaries having financial difficulties.
Trusts are effective tools for transferring and managing wealth across generations and accomplishing family wealth management objectives. They are necessary under the right circumstances, but they are also fraught with dangers and complicated rules. Because of this, the choice of trustee, as well as the responsibilities such a trustee will have, represent very important decisions and should not be made lightly or without careful consideration.
Facebook Twitter Linkedin Youtube. Understanding the Duties of a Trustee in Administering a Trust. Featured , Analysis , May Issue June Get Copyright Permission. In Brief Trusts enable individuals to ensure the financial health of loved ones long after they are gone, but only if they are properly set up and administered. Estates and Trusts Estates need to be administered and distributions made to the beneficiaries.
Definition and Types of Trusts A trust is an entity established by a person, called a grantor, for the benefit of others, called beneficiaries, that is controlled or operated by a third person or entity, called a trustee. Trustees Trustees must be chosen to administer a trust. Trust Taxation Irrevocable trusts that are not grantor trusts or living trusts are taxed on undistributed income at the trust tax rate schedule.
Trusting Trustees and Executors A potential trustee or executor should make sure she knows what she is getting into before accepting this responsibility. Below are tips to ensure the reliability of trustees and executors and to protect the beneficiaries: Choose the trustee and executor with care. This is not a popularity contest; an important and serious responsibility is being conferred. Consider appointing a bank or trust company, which may have more safeguards in place.
Require a fidelity bond. This is an expense, but the insurance company will then ensure the proper performance of the executor or trustee.
Part of their due diligence will be to assess the creditworthiness and background of the people selected. Ask for regular reports of financial activity and a listing of assets and liabilities at least quarterly. Note that fiduciaries have the responsibility to regularly account to the beneficiaries. Some even feel that a Trustee must pay more attention to the Trust than they do his or her own personal accounts. Understand the terms of the Trust and ensure safety of assets: Assets within a Trust must remain safe, so a Trustee should understand the basic terms outlined in the Trust.
Invest assets when necessary: If the Trust dictates, a Trustee should invest assets with the intention of preserving them now and in the future. Make ongoing decisions: As needed, Trustees should be willing and able to make decisions about how and when beneficiaries receive payment, as well as decide on other provisions of the trust.
Keep in mind that these decisions are with respect to discretionary powers given to a trustee. That's mandatory, so the trustee really doesn't get any say in it or at least not much. But, our Trust also says the trustee may give additional distributions as needed. That's discretionary and the trustee has to determine if it's a legitimate need and then determine how much to distribute. Communicate with and answer beneficiaries' questions as needed: Communication can include things such as providing statements and account information and offering an overview of tax reports.
In most cases, when you create a Trust you are both the Trustee and the beneficiary, and you have more flexibility over what you can and cannot do. If you are ever to become incapacitated, or upon your death, the person you name Successor Trustee then steps in. Even after the basic responsibilities of a Trustee are known and understood, there are often several questions that tend to come up. Knowing the answers to some of the following questions can help ease any stress and uncertainty a Trustee may feel as they take on their role.
In general, yes, a Trustee can be held personally liable. Trustees can protect themselves by keeping accurate, detailed records of the financial transactions and distributions. The difference between a beneficiary and a Trustee is simple. Married couples are often co-trustees so that when one dies or becomes incapacitated, the surviving spouse can continue to handle their finances with no other actions or steps required, including court interference.
A successor trustee is named to step in and manage the trust when the trustee is no longer able to continue usually due to incapacity or death. Typically, several are named in succession in case one or more cannot act. Sometimes two or more adult children are named to act together.
Sometimes a corporate trustee bank or trust company is named. Sometimes it is a combination of the two. The beneficiaries are the persons or organizations who will receive the trust assets after the grantor dies. A trust is a legal entity that can own assets. There are different kinds of trusts: testamentary created in a will after someone dies ; irrevocable usually cannot be changed ; and revocable living trusts.
Today, many people use a revocable living trust in addition to a will in their estate plans because it avoids court interference at death probate and incapacity. It is also flexible. As long as the grantor is alive and competent, the grantor can change the trust document, add or remove assets, and even cancel it. For a living trust to work properly, the grantor must transfer assets into it.
The grantor should make you familiar with the trust and its provisions. You need to know where the trust document, trust assets, insurance policies medical, life, disability, long-term care , and other important papers are located.
However, do not be offended if the grantor does not want to show you the values of the trust assets; some people are very private about their finances. This would be a good time to make sure appropriate titles and beneficiary designations have been changed to the trust.
Some assets, like annuities and individual retirement accounts, may list the trust as a contingent beneficiary. You also need to know who the trustees are, who successor trustees are, the order in which you are slated to act, and if you will be acting alone or with someone else. The most important thing to remember when you step in as trustee is that these are not your assets.
You are safeguarding them for others—for the grantor if living and for the beneficiaries, who will receive them after the grantor dies. As a trustee, you have certain responsibilities. For example, you must follow the instructions in the trust document:. No, of course not. You can have professionals help you, especially with accounting and investing. You will also probably need to consult with an attorney from time to time.
However, as trustee, you are ultimately responsible to the beneficiaries for prudent management of the trust assets. The trust may require one or more doctors to certify the grantor is not physically or mentally able to handle his or her financial affairs.
First, make sure the grantor is receiving quality care in a supportive environment. Give copies of health care documents medical power of attorney, living will, etc. If someone has been appointed to make health care decisions, make sure that person has been notified.
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