What Is a Trust?

A trust is an arrangement that allows a third party, (the "trustee"), to hold assets on behalf of others (the "beneficiaries"). Trusts can be arranged in many ways and can specify exactly how and when your assets pass to your beneficiaries.

Benefits of trusts include:

·Control of your wealth.

You can specify the terms of your trust to control when and to whom distributions are to be made. If you establish a revocable trust during your lifetime, your trust assets will remain accessible to you for the remainder of your life.  After your death, the remaining trust assets will then pass to the persons whom you designate, or can continue to remain in trust for their benefit for the period of time that you designate. Trusts can also address complex situations, such as children from more than one marriage.

·Protection of your legacy.

A properly written trust can help protect your assets from your heirs’ creditors or from beneficiaries who may not be capable of money management.

·Privacy and probate savings.

Probate is a matter of public record - a trust can allow your assets to pass outside of probate and remain private. This can also result in saving time, court fees and legal expense.

·Basic types of trusts:

Marital trust.  Designed to provide benefits to a surviving spouse. The assets in the trust are generally included in the taxable estate of the surviving spouse.

Qualified Terminable Interest Property ("QTIP") trust.Used to provide income for a surviving spouse. Upon the spouse’s death, the assets then go to additional beneficiaries. Often used in second marriage situations, as well as to maximize estate tax planning.

Bypass trust.Also known as "credit shelter" trust, these trusts are used to bypass the surviving spouse’s estate in order to make full use of any federal estate tax exemption for each spouse. These types of trusts are used less frequently today due to the change in federal estate tax laws.

Testamentary trust. These trusts are written in a Will and established under the Will after death. A probate is required in order for these trusts to come into effect.

Irrevocable life insurance trust. ("ILIT"). These trusts are designed to exclude life insurance proceeds from your taxable estate while providing liquidity to your estate and/or the trusts’ beneficiaries.

Charitable lead trust. These trusts allow certain benefits to pass to a charity for a period of time and then to your beneficiaries, resulting in potential death tax savings.

Charitable remainder trust.This type of trust allows you to receive an income stream for a defined period of time with the trust assets then passing to a charity. These trusts can result in income and death tax savings.

Generation-skipping trust.Allows you to use your "generation-skipping tax exemption", so that the trust assets bypass your children and are distributed to your grandchildren or later generations without incurring death taxes on the subsequent death of your children.

·Revocable vs. Irrevocable - There are many types of trusts; a major distinction between them is whether they are revocable or irrevocable.

Revocable trust: Also known as a living trust, a revocable trust can help assets pass outside of probate, yet allow you to retain control of your assets during your lifetime. It is flexible and can be dissolved at any time should your circumstances or intentions change. A revocable trust typically becomes irrevocable upon your death.

You can name yourself trustee (or co-trustee) and retain ownership and control over the trust, its terms and assets during your lifetime, but make provisions for a successor trustee to manage them in the event of your incapacity or death.

Although a revocable trust may help avoid probate, it is usually still subject to estate taxes. It also means that during your lifetime, the assets in the trust are treated like any other asset you own.

Irrevocable trust: An irrevocable trust typically transfers your assets out of your estate and potentially out of the reach of estate taxes and probate, but cannot be altered by you after it has been executed. Therefore, once you establish the trust, you will lose control over the assets and you cannot change the trust terms or decide to dissolve the trust. An irrevocable trust is generally preferred over a revocable trust if your primary aim is to reduce estate taxes by effectively removing the trust assets from your estate.  

Certain types of irrevocable trusts can protect your trust assets from creditors or a legal judgment against you.

For additional information or questions about any of the above matters, contact Jerre Mosley.

Trusts

Jerre Mosley

Experienced Wills, Trusts &

Estate Attorney, Chattanooga, TN