Just Trust Me
A trust is an agreement where you manage property to benefit someone else. In practice, a trust is a ten-dollar-to-fund strategy to transfer property to people you like while keeping it far away from the people you hate. To break down the “trust,” please embark on a magical school-bus tour through its various categories and applications.
Why would you need a trust? Generally, your surviving spouse has a claim against your estate even if he or she does not receive benefits under a will. Therefore, to keep your estate under your control, even after death, you need a trust to convert your estate property into non-probate property. Trusts are a celebrated strategy, defended by centuries of estate law, for keeping your assets away from your creditors, spouse, and ex-spouses. But what is in a trust?
Ordinarily, a trust holds and conserves particular property: homes, cash, jewelry, pets, bank accounts, stocks, and more may be contributed to a trust. To prevent angry, torch and pitchfork wielding mobs from invalidating your trust, a licensed attorney should confirm what particular property you may transfer to the trust. Such contributions convert the previously vulnerable property into non-probate property, safe to transfer according to your express wishes. To create a trust, you need to create a Trust Agreement. This document outlines the powers, duties, and restrictions of the trustee.
The trust assumes a more definite form when you decide what category of trust you want. The categories or trust differ in terms of: tax treatment, the ability of creditors to reach trust assets, the degree of control exercised by you and your beneficiaries, and the ability of your beneficiaries to benefit from the trust. Some of the distinct categories of trust are; inter-vivos and testamentary trusts, revocable and irrevocable trusts, grantor and non-grantor trusts, and U.S. or foreign trusts.
In terms of inter-vivos and testamentary trusts, the inter-vivos trust is created during your lifetime and a testamentary trust is a trust created by a will. An inter-vivos trust must be created during your lifetime. A testamentary trust is created by your will and is only effective upon your death.
When it comes to revocable trusts and irrevocable trusts, the deciding factor is commitment. An inter-vivos trust may be “revocable,” meaning the settlor may undo the trust and take back the trust assets. Alternatively, an “irrevocable,” trust means that the settlor gives up the power to take the trust back, it is final. Unless you are a zombie or a vampire, all testamentary trusts are irrevocable.
Grantor and non-grantor trusts are tax concepts. A grantor trust is considered to be owned by you for income tax purposes. This means that all income from the trust is taxed directly to you even though the income remains in the trust or is paid to another beneficiary. If a trust is a non-grantor trust, the trust is taxed on the income, although distributions from the trust may be taxed to the beneficiaries.
Similarly, U.S. and foreign trusts are another tax concept. A U.S. trust must pay federal income tax on its worldwide income, unless the grantor or the beneficiary is taxed on that income. A foreign trust must pay federal income tax on its U.S. source income. However, American taxpayer beneficiaries of a foreign trust may be taxed on any distributions received from the foreign trust.
Inter-vivos vs. testamentary trusts, revocable vs. irrevocable trusts, grantor vs. non-grantor trusts, and U.S. vs. foreign trusts are a few of the distinct categories of trusts. Each vary in terms of tax treatment, the ability of creditors to reach trust assets, and the degree of control exercised by you and your beneficiaries. Transfer taxes levied on property after your death (depending on your individual tax situation) will make you prefer certain trusts over others. Knowing the intricacies of a trust provides a fantastic way to protect your assets, whatever they may be!
