What is a Trust, often referred to as a “Living Trust” and why do I need one?
Sometimes clients don’t understand the basic concept of a trust and the role that it can play in proper estate planning. The use of a “trust” simply signifies that there are three individuals or entities (rather than two) to accomplish a transfer of assets to a beneficiary. When a trust’s terms are set forth in a Last Will and Testament , the trust is known as a “Testamentary Trust” created by a Testator. When the terms of the trust are set forth in a separate document, it is known as a “standalone” trust, often referred to by non-professionals as a “Living Trust.” The person creating a trust is known as the grantor (or sometimes the settlor, creator or trustmaker). Often there are benefits to having a separate Living Trust which allows for its funding during the Grantor’s lifetime, as opposed to a Testamentary Trust which can only be funded upon a Testator’s death. Either way, the person receiving and controlling the asset for someone else’s benefit is called the Trustee. The person receiving the asset or a beneficial interest in the asset is the known as the beneficiary.
In the situation where a beneficiary is considered too young to receive assets or has yet to reach the age of eighteen (18), an estate plan must include trust provisions to allow for another person to handle those assets for that beneficiary until such time as the beneficiary reaches an age deemed appropriate by the testator/grantor. The terms and conditions upon which the trustee holds the asset for the beneficiary can be as varied as desired. The testator/grantor can instruct the trustee exactly when, how much and for what purpose trust assets can be used for the beneficiary or, alternatively, the testator/grantor can provide the trustee with as much discretion as desired to allow the trustee to make those decisions as to what distributions are necessary. Most trusts set forth certain ages when a beneficiary receives at least a portion of the trust property outright and provide for the remainder of the trust assets to be provided to the beneficiary when the testator/grantor believes that a trustee is no longer needed. In circumstances where the testator/grantor suspects that the beneficiary will always be financially irresponsible, trust assets can be held perpetually in what is known as a “spendthrift trust” to protect the assets from creditors. In the instance where a beneficiary is disabled, a “Special Needs Trust” can also be created to protect receipt of governmental benefits. (Please see the section on Special Needs Trusts).
Another typical use of trusts is for tax purposes. As of 2017, New Jersey only imposed an Estate Tax on estates over $2,000,000.00 and as of 2018 eliminated the New Jersey Estate Tax completely. Also, as of 2017, the Federal Estate and Gift Tax exemption is $5,490,000.00 and the annual gift exclusion is $14,000.00 It should be understood that every individual is entitled to pass these funds to his or her beneficiaries without imposition of estate tax to these exemption amounts. Thus, in the case of a married couple, the use of a trust can double the amount that can be passed on to your loved ones without the imposition of Estate Tax.
This type of trust goes by many names such as a credit shelter trust, bypass trust, family trust, or disclaimer trust. While the mechanism of these trusts may differ somewhat (and may be contained in a Last Will and Testament or standalone trust), the objective is the same, to avoid taxes. It works like this. The spouse that is first to die leaves his or her assets in a trust for the benefit of the other spouse. The surviving spouse has the use of some or all of those funds. However, when the second spouse dies, the trust assets pass to the remainder beneficiaries as well as the assets in the second to die spouse’s estate. In this manner, a married couple can pass $10,960,000.00 to beneficiaries without incurring Estate Tax.
There are many other types of trusts. One is an Irrevocable Life Insurance Trusts (“ILITs”) which are used to keep life insurance proceeds out of both spouses’ estates for tax purposes. Other trusts include Charitable Remainder Trusts, “CRTs,”) or reverse Charitable Remainder Trusts known as Charitable Lead Trusts, (“CLTs”), both created for the purpose of making charitable bequests while retaining rights to the assets and receiving tax benefits; Qualified Personal Residence Trusts (“QPRTs”) or Grantor Retained Income Trusts (“GRITs“), also created to retain rights to one’s home while giving away a remainder interest to that property for tax purposes, as well as Generation Skipping Trusts, in order to give assets to grandchildren, thereby “skipping” one’s children. A trust can even be established for animals, frequently referred to as “pet trusts.” These are but a few examples of some of the various types of trusts that can be created.
The Law Office of Richard M. Cohen is prepared to draft the estate planning documents you desire, including revocable and irrevocable trusts, to represent your needs.