A trust splits ownership of its assets Legal ownership Equitable ownership The purpose of a trust is to hold assets for the ultimate benefit of a person or class of people without giving the beneficiary immediate access to the trust assets ID: 692821
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Slide1
What is a Trust?
Ownership of any asset normally includes the right to control it and the right to benefit from it.
A trust splits ownership of its assets:
Legal ownership
Equitable ownership
The purpose of a trust is to hold assets for the ultimate benefit of a person or class of people without giving the beneficiary immediate access to the trust assets.Slide2
Parties to a Trust
Grantor
Establishes the trust but retains no interest in the trust assets
Trustee
Holds legal title to the trust assets
Wields control over the assets and is responsible for them
Beneficiary
Ultimate beneficial owner of the trust assets
Equitable “owner” of the trust assetsSlide3
Trust Formation
Identification of the parties
Grantor, trustee and beneficiary
One person can fill multiple roles
Ex. The grantor can sometimes be the trustee and the trustee is often one of the beneficiaries
Except that the beneficiary and trustee cannot be exactly the same or the trust
merges
and is extinguished
Trust
res
Required for living trusts
Though this can often be a nominal amount only
Not applicable for testamentary trusts since the trust doesn’t take effect until the testator dies
Signatures of grantor and trustee
Many states require witnesses or notarized signaturesSlide4
Trust Agreement
Most trusts are based on written agreements.
It is almost never advisable to intentionally create an oral trust.
However, an oral trust agreement is not inherently invalid.
Ex. Bob gives $1,000 to Jane and says “Please hold this for Joan.” This is a trust arrangement.
Without the writing, a court can still infer the existence of a trust for fairness or equitable reasons. These include:
Constructive trusts
Implied trustSlide5
Revocable Trusts
Completely flexible and revocable by the grantor. Grantor can:
Amend the trust
Take money out of the trust
Change the beneficiaries
Revoke the whole trust
Etc.
Sometimes referred to as a ”will substitute”
It is comparable to a will in that it does little until the death of the grantor
Grantor is often the initial trustee
Backup trustees are named for the grantor’s disability or after the grantor’s deathSlide6
Revocable Trusts - Advantages
Probate Avoidance
Problems associated with probate
Delay in administration and distribution after death
Legal fees in bringing the proceeding
Public nature of the proceeding
Court supervision
Bond requirement
Opportunity for interested parties to challenge a will
Disability planning
Since the trustee can take over if the grantor is disabled, there is no need to
Bring a guardianship proceeding which is expensive and time consuming
Rely on a power of attorney, which many banks may not respectSlide7
Revocable Trusts - Disadvantages
Expense at time of formation, including:
Legal fees
Filing fees for deeds
Hassle of funding the trust initially
If the revocable trust is not funded with all or substantially all of the grantor’s assets, you may have to bring a probate proceeding anyway, thus nullifying the main point of the trust!
Sometimes lack of court supervision can be a bad thing, especially when there is a potential for abuse or disagreements among the heirs.Slide8
Irrevocable Trust
The grantor may not revoke, amend, or modify the trust.
The grantor may retain some control over the trust assets, however, depending on the purpose of the trust.
Irrevocable Trusts are often used for one or more of the following purposes:
Medicaid or other benefits eligibility planning
Estate Tax Planning
Creditor protection Slide9
Testamentary Trust
This means a trust set up by a will.
It takes effect upon the death of the testator
Common Examples:
Credit Shelter trust
Marital trust
Trust for benefit of minors
All of these can be established by a trust (revocable or irrevocable) after the death of the grantor in addition to being established by a will.Slide10
Trusts that can hold S Corporation Stock
The general rule is that only individuals can be shareholders of S Corp stock.
Since a client may hold S Corporation shares, a trust that cannot hold these shares may be an incomplete estate planning tool.
Trusts that
can
hold S Corporation stock include:
Grantor trusts
These trusts are treated as being entirely owned by the grantor for income tax purposes.
Qualified Subchapter S Trust (“QSST”)
Electing Small Business Trust (“ESBT”)Slide11
Qualified Subchapter S Trust (“QSST”)
Requirements for a trust to qualify as a QSST:
There can be only one income beneficiary
The income beneficiary must be a U.S. resident
All income of the trust must be distributed to the income beneficiary at least annually
Principal can only go to the one beneficiary
Though the discretion as to whether to distribute can remain with the trustee
The income interest must last until the trust termination or the beneficiary’s death
(whichever is earlier)
The trust must file an election to be treated as an eligible S Corporation shareholder
Income from a QSST is taxed as income to the beneficiary.Slide12
Electing Small Business Trust (“ESBT”)
Similar to the QSST
Advantages over the QSST
The ESBT may have multiple beneficiaries.
The income can be allocated by the trustee among multiple beneficiaries and it may be accumulated rather than distributed.
Disadvantage
Taxed at the highest marginal income tax rate for individuals.
(39.6% as of 2013)