Whether you're seeking to manage your own assets, control
how your assets are distributed after your death or planning
for incapacity, trusts can help you to accomplish your goals.
Their power is in their versatility—many types of trusts exist,
each designed for a specific purpose. Although trust law is
complex and establishing a trust requires the services of an
experienced attorney, mastering the basics isn't hard.
What is a trust?
A trust is a legal entity that holds assets for the benefit of
another. Basically, it's like a container that holds money or
property for somebody else. You can put practically any kind
of asset into a trust including cash, stocks, bonds, insurance
policies, real estate, and artwork. The assets you choose to
put in a trust depend largely on your goals. For example, if
you want the trust to generate income, you may want to put
income-producing securities such as bonds, in your trust. Or,
if you want to create a pool of cash that is accessible to pay
estate taxes due at your death or to provide for your family,
you might want to fund your trust with a life insurance policy.
When you create and fund a trust, you are known as the
grantor. The grantor specifies who will benefit from the
trust. This person or entity is known as the beneficiary.
Beneficiaries are typically your family and loved ones but can
be anyone, even a charity. Beneficiaries may receive income
from the trust or may have access to the principal of the trust
either during your lifetime or after your death. The trustee is
responsible for administering the trust, managing the assets,
and distributing income and/or principal according to the
terms of the trust. Depending on the purpose, you can name
yourself, another person, or an institution such as a bank to
be the trustee. You can even name more than one trustee.
Why create a trust?
Since trusts can be used for many purposes, they are popular
estate planning tools. Trusts are often used to:
- Plan for families with special needs
- Protect assets from potential creditors
- Avoid the expense and delay of probating your Will
- Control and direct distributions (very helpful in cases
where there are minors or spendthrifts)
- Manage assets with a built in team of advisors
- Set up a fund for support in the event of your incapacity
- Plan for tax savings - such as the ability to shift part of
your income tax burden to beneficiaries in lower tax
brackets and also Medicaid planning
The type of trust used, and the mechanics of its creation will
differ depending on what you are trying to accomplish. In fact, you may need more
than one type of trust to
accomplish all of your
goals. Although trusts have
many advantages, it’s also
important to be aware of
additional aspects associated with trusts:
- Set up and maintenance fees such as, trustee fees,
professional fees, and filing fees that must be paid
- Depending on the type of trust you choose, you may give
up some control over the assets in the trust
- Maintaining the trust and complying with recording and
notice requirements can take up considerable time
- Unfavorable tax consequences - Due to compressed
marginal tax brackets, trust funds are taxed at a much
higher rate than assets not owned by a trust
You should discuss the pros and cons of setting up a trust
with your attorney and financial advisor if you are considering
a trust.
The duties of the trustee
The trustee of the trust is a fiduciary, someone who owes a
special duty of loyalty to the beneficiaries. The trustee must
act in the best interests of the beneficiaries at all times. The
duties of a trustee are not to be taken lightly, such duties
include, protecting and investing the trust assets for the
benefit of the beneficiaries, keeping complete and accurate
records, exercising reasonable care and skill when managing
the trust, prudently investing the trust assets, and avoiding
mixing trust assets with any other assets, especially his or
her own. A trustee lacking specialized knowledge can hire
professionals such as attorneys, accountants, brokers, and
bankers if it is wise to do so. However, the trustee can't merely
delegate responsibilities to someone else.
Although many of the trustee's duties are established by state
law, others are defined by the trust document. If you are the
trust grantor, you can help determine some of these duties
when you create the trust.
CNB Can Help
If you have any questions or would like guidance, please feel
free to schedule an appointment at (585) 394-4260.
Source: ©2019 Broadridge Investor Communication Solutions, Inc. This material provided by Ramona Green.
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