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Frequently
Asked Questions Regarding Trusts
1. What is a trust?
A trust is an arrangement whereby one person or corporation holds
property for the benefit of another. The person who creates the
trust and transfers the property to another is the "grantor."
The person or corporation that holds the property for the benefit
of the grantor is the "trustee."
A trust can be either revocable (meaning the grantor can revoke
the trust and take back the assets) or irrevocable (meaning the
grantor has given up the right to revoke the trust and take back
the assets).
A trust that
is created during the grantor's lifetime is a living trust or inter-vivos
trust. In contrast, a trust that is created under a testator's will
is a testamentary trust. Under Virginia law, the trustee of a living
trust is generally not required to file annual accountings with
the commissioner of accounts as the trustee of a testamentary trust
is required to do.
In the context
of estate planning, revocable living trusts have become a valuable
estate planning tool. Unlike the irrevocable trust, the revocable
living trust is a tax-neutral trust since the grantor is still treated
as the owner of the assets for income, gift, and estate tax purposes.
The revocable living trust may be (i) unfunded until assets are
transferred to the trust under a will, (ii) fully funded with the
grantor's entire estate, or (iii) partially funded with specific
assets with the remainder being transferred under the will.
2.
What is a living trust?
A living trust (also called an "inter-vivos trust") is
a trust that is created during the creator's lifetime. The creator
of the trust is referred to as the "grantor." Living trusts
can be either revocable with the grantor having the power to revoke
the trust and re-aquire the assets or irrevocable with the grantor
giving up this power.
Revocable living trusts are used frequently for a variety of estate
planning reasons. For example, assets held in a revocable living
trust are not included in the decedent's probate estate. Thus, use
of a living trust can avoid certain probate taxes and administrative
expenses. In addition, since the assets held in a living trust are
not subject to probate, they often do not become a matter of public
record. Unlike the irrevocable trust, the revocable living trust
is a tax-neutral trust since the grantor is still treated as the
owner of the assets for income, gift, and estate tax purposes. The
revocable living trust may be (i) unfunded until assets are transferred
to the trust under a will, (ii) fully funded with the grantor's
entire estate, or (iii) partially funded with specific assets with
the remainder being transferred under the will.
Although a living trust can be a valuable estate planning tool,
it is not a substitute for a will. Even if an individual has created
a living trust, a will is necessary to dispose of assets that have
not or cannot be placed in the trust, to name an executor of the
estate, or to appoint nominees for guardians. Therefore, a will
must be carefully coordinated with a living trust.
3.
What are some of the reasons for using trusts in estate planning?
There are
numerous types of trusts that may be useful in developing an estate
plan. Some of the more common reasons for creating trusts in the
context of estate planning are the following:
a. Living
revocable trust to avoid probate : Assets held in a living
trust are not subject to probate administration. Therefore, some
individuals create living trusts to avoid probate tax and administrative
expenses. A funded living trust may also avoid making the identity
and value of assets a matter of public record.
b. Living revocable trust to manage assets: Another reason
individuals may want to create a living trust is to provide for
the management of one's assets once that person can no longer
handle his or her own financial affairs or no longer wishes to
do so.
c. Credit shelter trusts: One or more living or testamentary
trusts may be necessary if an individual wishes to take advantage
of the credit that is available for federal estate and gift tax
purposes. This is particularly useful if the individual wishes
for the assets to be available to a surviving spouse but not taxed
upon the death of the surviving spouse. Many times, the beneficiary
of life insurance proceeds and retirement plan proceeds can be
coordinated with credit shelter trusts by designating the trustee
as a beneficiary.
d. Marital trusts : Some individuals set up marital trusts
to take advantage of the marital deduction that is available for
federal estate and gift tax purposes while still retaining some
control over the ultimate disposition of the assets at the surviving
spouse's death.
e. Other tax-saving trusts: An individual may want to set
up a trust during his or her lifetime in order to transfer assets
to children or more remote descendants to take advantage of the
gift tax annual exclusion.
f. Trusts for the benefit of minors or persons under a disability:
Trusts may also be used to hold assets for the benefit of other
persons such as children or other persons under a disability.
g. Irrevocable life insurance trusts: These trusts are
created to own life insurance policies so that the policy proceeds
will not be included in the insured's estate for estate tax purposes.
h. Irrevocable charitable remainder trusts (CRTs): This
type of trust is set up to provide an annual stream of income
to the donor or other non-charity with the remainder passing ultimately
to a charity. This is a particularly popular tool for persons
holding assets that have experienced significant appreciation
like stocks or real estate because there is no capital gains tax.
CRTs, because they benefit a charity, also qualify the individual
for an income tax deduction. The amount of the deduction is the
present value of the remainder interest to the charity. In addition,
the trust itself is exempt from income taxation. For estate planning
purposes, the value of the trust will qualify for a charitable
deduction if it is included in the donor's gross estate.
These are
just a few ways to use trusts in the context of estate planning.
Your attorney and accountant (or other financial advisor) can assist
you in determining whether a living or testamentary trust would
be appropriate in your estate plan.
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