Hans Kasper, MS-CPA, PS

Trusts and Estates
 

The titles "living trust", "grantor trust", and "revocable trust" are all the different names for the same type of trust.  This type of trust is created while you are living, is revocable (trust specifications can be changed while you are alive), and for which you grant property into the trust.

A testamentary trust is a trust that is created through your will after you are dead.
 

Why would a person want to create a trust?

Let's talk about trust law.  Trust law was create out of English common law back in the 1400s to 1600s.  If the King didn't like you, he could simply take your land.  However, if you didn't own your land (you had put it into a trust), then he couldn't take it.  After centuries had passed and the King became a nicer guy, trusts took on a new purpose.  If you were a wealthy landowner, had only female heirs (remember that a husband by law owned all of the wife's property), and didn't want useless young men marrying your daughters for their money, then you put everything into a trust for the benefit of your daughters which their husbands, useless or not, could not get their hands on.

In the USA, trusts were the precursors to corporations (Standard Oil was originally a trust) and later took on tax aspects when the tax law was created in 1913.
 

Today, trusts can be used to:

• protect your children from themselves by spending all of your money as soon as they inherit it by giving it to them over time,

• protect your sons and daughters from useless spouses as stated above by retaining the money in a trust from which they can draw on only with the trustees approval,

• protect your sons and daughters from their creditors by using a spendthrift clause in the trust,

• protect and provide for your mentally ill or handicapped children's care,

• gift money to charities during your lifetime and retain the right to the income during your lifetime,

• avoid some or all of your estate taxes,

• avoid probate for some or all of your assets, and

• anything else you might want to do.

Trusts are often used for asset protection.

Some states--Alaska, Delaware, Nevada, Rhode Island and Utah--allow individuals to set up asset protection trusts.  these are self-settled trusts in which a grantor sets up, manages, and benefits from the trust but the assets are protected from creditors' claims.  The effectiveness of these trusts to bar creditors has not been fully tested.  For example, it is not clear whether nonresidents can us these trusts for asset protection.  Can a person in New York set up a Delaware trust for asset protection against New York creditors?

Trusts That Avoid Probate

A living trust avoids probate for all property placed into it before your death and a testamentary trust does not avoid probate since all property is placed into it after your death.  Attorney's will tell you that probate in Washington State is a simple process as compared to California; however, I have seen some probate nightmares and, therefore, recommend a trust for all estates greater than $1,000,000.
 

Trusts That Eliminate or Reduce Estate Taxes

If correctly created, a living trust and a testamentary trust can avoid some or all of your estate taxes depending on the size of your estate.  This is accomplished for estates greater than $1,000,000 in 2003 by splitting the estate into two separate trusts on the death of the first spouse.  This clause allows for two estate tax exemptions of $1,000,000 rather than just one and allows for an estate tax savings of about $300,000 maximum.  The trust for the "A" person (above ground) is a revocable trust which they can live on and change in any manner they wish during their lifetime.  The trust for the "B" person (below ground) is a irrevocable trust (the beneficiaries can not be changed) which the "A" person can live on in a manner in which they are accustomed (you can not go to Las Vegas and gamble the money away, but you can go on a cruse) and has a right to the income from.

Unless you are very rich, do not create an irrevocable trust during your life time unless it is a life insurance trust explained below.

While it does not reduce estate taxes, an irrevocable life insurance trust can be used to pay the estate taxes with tax free money.  Please talk to an estate attorney for more information about this type of trust.

Another way to avoid estate taxes is to gift to charity all amounts greater than the estate tax exemption limits ($1,000,000 in 2003).
 

There are more types of trusts than you can imagine.  To learn more about trusts please click here, see your attorney, or contact us for the name of an estate planning attorney.

 

Top of Page This page was last updated on 05/13/2010