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A trust is an arrangement for an orderly transfer of property from one person transferring the property (grantor) to designated beneficiaries. The property may be real, tangible, or intangible. A trust is created by a grantor, who entrusts someone (a trustee) to distribute a property to the grantor's beneficiaries in accordance with trust agreement. A trust is a legal document which is a very commonly used technique for estate planning (orderly wealth transfer once grantor dies). ...Show details

The trust is governed by the terms of the trust document, which is usually drafted by an estate attorney. It is also governed by the local laws. The trustee is obliged to administer the trust in accordance with both the terms of the trust document and the governing law.

The person creating a revocable trust (grantor) retains the right to alter it or its beneficiaries at any time. A revocable trust is also known by the names of: 'grantor trust', 'living trust', and 'inter vivos'. You don't need to reference a trust in your will. You can not change the beneficiary of a trust via will because a trust is an independent legal entity. Trust is a tool to implement now what you would like to implement after your death. Once the person creating a revocable trust dies, a revocable trust becomes an irrevocable trust i.e. no change can be made to its terms e.g. beneficiary, how assets are invested, or are distributed among a set of beneficiaries. ...Show details

Note that if you put any appreciating assets or income producing assets in this trust, any capital gain or income from these assets is taxable to the person setting up this trust (Grantor). Grantor can make himself the 'trustee' too.Aside from taxes, a revocable trust offers two key benefits:

a. A private transfer of assets. An asset transfer via a trust arrangement is a private affair. On the other hand, if an asset is transferred via a will, everyone gets to know because the assets in a will go through the probate process involving court proceedings. Additionally, the transfer of property via a will could take much longer.

b. Better management of assets after death. The asset transfer does not have to be immediately after death. The terms and conditions of the trust allows you to manage the transfer of assets in the same way as if you were alive.

As the name indicates, an irrevocable trust is the trust that can not be revoked. That means if you have setup an irrevocable trust, you can not alter it or its beneficiaries. In other words you don't have any 'control' on this trust. Because you don't have any control on the assets, once transferred to an irrevocable trust, any capital gain or income from the trust assets is not taxable to the grantor (person setting up the trust). As a result, an irrevocable trust offers a useful tax efficient wealth transfer tool. Some key benefits of an irrevocable trust include:...Show details

  • A tax efficient transfer of wealth: An irrevocable trust can be setup for any beneficiaries including grand children. If the contribution in a given year is limited to permissible gift exclusion limit of $14,000 per beneficiary per year (or twice that amount if it is a joint gift by you and your spouse), then there aren't any gift or generation transfer taxes on this amount.
  • It also helps you protect these assets from creditor claims against you (the grantor).

While a 'will' is a minimum requirement for protecting the interests of your dependents in case something happens to you, setting up a trust is a much better approach to plan for any unforeseen event. If you have minor children (under 18 or 21 depending on the state) and your will doesn't have specific provisions on how the money will be spent for the benefit of your children, a court will appoint a guardian to manage your assets and to pay for your children's needs until they turn major. A court appointed guardian may not have the same value system as yours, and the court approval process for paying for your children's needs could make the process worse. ...Show details

As we all know, most people at the age of 18 or 21 are not very money savvy. So, it makes sense to list important things where the money needs to be spent. For example, you could include a provision for private education, down payment on a home etc. Setting up a trust requires an estate attorney who may charge anywhere from $1,000 to $3,000 for setting up a trust. So, if the amount left is not substantial, you may want to just use your will to handle this. A trustee, whether a corporate trustee (generally a bank or some other financial institution) or an individual, is generally held to a higher standard of care as compared to a custodian of your will. A trustee is required to follow the trust requirements prudently. If not, the trustee could potentially be sued by beneficiaries for mismanaging the trust. If you decide to set up a trust for your children, here are a few key planning ideas to consider....Show details

  • A trust can be setup with spendthrift provision. This protects the trust assets from a beneficiary's creditors.
  • While setting up the trust for your children, consider the personality of the custodian (contingent custodian) that you are appointing for your children. You could even specify how much to spend on basic needs (food, clothing, shelter) if you think the custodian is an easy spender or doubt that the custodian may spend some of the money on personal expenses.
  • You can also setup an asset distribution plan. As we all know, people in their younger ages are not very prudent with money management, and thus it makes sense to layout when and what portion of the money can be withdrawn by the beneficiary child. For example, you could allow access to 25% of the money when the child becomes a major, 25% at the age of 25, 25% at the age of 30 and the rest at the age of 35 etc.

A Qualified Terminal Interest Property (QTIP) trust is an effective mechanism to manage the transfer of wealth if you have children from an ex-spouse. Under this trust, the surviving spouse gets a lifetime income while the remainder can go to the children from previous marriage. This income must be distributed to the surviving spouse at least once a year. However, the assets of QTIP trust are included in the estate of the person setting up this trust.

A QPRT (Qualified Personal Residence Trust) is a trust that is set up by someone (grantor) to transfer the ownership of either a personal residence or a vacation home to children or other beneficiaries. As the name indicates, a QPRT applies to a residence only. A QPRT can also allow you to retain the right to stay in the house for a fixed period of time. This is a tax efficient transaction because at the time of transfer, your property is valued at market price less the discount for any rent this property would earn for the duration of the term. By making this arrangement, you get the appreciation of property out of your estate. It is even more attractive during a housing market downturn because house prices are low. But a key requirement is, you must outlive the term of QPRT otherwise there is no tax advantage. The other disadvantage could be that after the term of QPRT, your beneficiaries may not let you live in this house and you may not have any other option....Show details

Before setting up a QPRT, you need to think about your personal situation from a few different angles (not applicable in the year 2010):

  • What will be the estimated value of your estate at the time of your death? This is important because if your total estate is going to be under $5,340,000 minus any non excludable gifts at the time of your death ( twice if you are married) then there may not be any need for getting into a QPRT. The reason you don't need to worry about QPRT in this case is that first $5,340,000 of estate is excluded from estate tax. This figure is per individual and you need to be careful about the titling of the property if you are planning for your spouse too.
  • The second angle is that if the above exclusion amount is going to change, or the estate tax rate is going to change in future. Given the condition of economy and country's debt situation, it is likely that estate tax (or death tax) may not only stay for longer but could potentially increase in coming years. However, the exclusion amount may not go below $1 million.
  • The third angle is your expected lifespan. If you are either likely to live only for a few years or for more than 15-20 years then you need to carefully weigh the benefits and downsides to a QPRT.

  • The other thing worth considering is the capital gains tax to your beneficiaries. If the house is transferred to beneficiaries via QPRT then the cost basis for beneficiaries would be your cost basis. Any appreciation on this would fall under capital gains tax when they sell this. If capital gains tax rates rise, this could be a problem for your beneficiaries. On the other hand if this property was transferred to your beneficiaries at your death without any QPRT, the cost basis for your beneficiaries would be the market value at the time of your death. This would result into lesser capital gains taxes later. So, you need to weigh in all these considerations before going through the effort and cost of setting up a QPRT.

  • Talk to a local Estate Attorney to draft and register trust documents. This attorney can also help you with setting up a will as well. The attorney may cost just a few hundred dollars to develop a comprehensive estate plan.
  • Once the trust is formed, you can open an account in the trust's name and fund this account. If assets include stocks, bonds, mutual funds or other securities, you need to open a brokerage account in the name of trust. The trustee can then operate the trust.