Trust In Estate Planning

Houston Rutherford & Reid Guthrie

12/1/2014

The Use of Trusts in Estate Planning

Estate Planning- Mitzi Lauderdale

Throughout history, trusts have been a beneficial and sometimes critical part of estate planning. Trusts have many different uses, and can be valuable to individuals looking to preserve, secure, or manage assets and property through a separate title. Trusts have many different uses throughout the estate planning and the financial planning industry. There are all sorts of tax advantages and loopholes that trusts can take advantage of when used properly and effectively.

First off, each trust is made up of different parts. Knowing the parts of the trust is the first step towards grasping the concept behind trusts

and their capabilities. Most trusts are made up of a grantor, a trustee, and beneficiaries. These components of a trust all have an important role.
The grantor of the trust, also known as the settlor, is the owner and sometimes the creator of the trust.

This individual places his/ her assets into the trust to be retitled to the ownership of the trust. Depending on the type of trust drafted, a grantor may or may not have to include the property held in the trust in his/ her gross estate upon death. However, trust documents specifically name the individual that the assets are to go to. Because of this, the trust and the assets within do not have to go through the probate process at the death of the grantor. Avoiding probate, and the fees that are often associated with probate, is another huge reason that trusts are common tools in the estate planning

process.
Trustees play a very valuable role when it comes to owning a trust. The book defines the trustee as “the individual or entity responsible for managing the trust assets and carrying out directions of the grantor that are formally expressed in the trust instrument”. The name really says it all when it comes to their responsibilities of maintaining the assets in the trust. In fact, the trustee has a fiduciary duty to act in the best interest of the trust. The Prudent Man Rule summarizes these duties, which is the rule stating that “the trustee, as a fiduciary, must act in the same manner that a prudent person would act if the prudent person was acting for his own benefit after considering all od the facts and circumstances surrounding the decision”. The prudent man rule truly shows how much thought a grantor needs to put into choosing the correct trustee for his/ her trust. Sometimes, multiple trustees will be chosen so that they check up on them and make sure they are being a responsible fiduciary.
Beneficiaries make up the final elements of a trust instrument. The beneficiaries of a trust document are “the person (or persons) who holds the beneficial title to the trust assets”. There are also sometimes different types of beneficiaries, such as an income beneficiary and a remainder beneficiary. The income beneficiary has the right to collect income from the trust but not receive trust assets. The remainder beneficiary is “the individual or entity who is entitled to receive the assets that remain in the trust on the date of its termination”. This means that if a small business were owned by a trust, the income from that business would be distributed to the any and all income beneficiaries. When the trust document expires, or the grantor dies, the trust assets (the business) are then given to the remainder beneficiary.
There can be many estate-planning outcomes depending on how trust instruments are set up and put into place. Some trusts are made to simply avoid probate, while others are set up to avoid estate taxes all together.
When looking into the different trust options its important to know what you’re looking for. Trusts can be split into many different categories as stated above, so in this paper we will stick to trusts that are created during the grantors lifetime and that are used in providing for the surviving spouse while being able to transfer assets to the next generations. A trust created during the lifetime of the grantor is called an inter-vivos trust; an inter-vivos trust has a greater upside than a testamentary trust (a trust made after death) because it avoids the probate process more often than not. The probate process is a good thing to avoid because it can be very time consuming and can be costly in taxes and fees.
The first type of inter-vivos trust we are going to look at is an irrevocable life insurance trust also known as an ILIT.

The purpose of this trust is to replace lost wealth at death by providing for the surviving spouse. An ILIT is used to prevent the insured party from having incidents of ownership on the life insurance policy covering his own life. In an ILIT the grantor makes a deposit into the trust and receives an annual payment from the trust. Upon the grantors death the surviving spouse will receive the death benefit but it will be included in the grantors gross estate. An important thing to note when looking into ILITs is that they are irrevocable meaning that once you deposit into A ILIT the amount deposited can never been withdrawn. Unless the trust is subject to a Crummy withdrawal right, then the beneficiaries have the right to make withdrawals from the ILIT for a set period of time, usually 30 days. Crummy provisions are very helpful when it comes to irrevocable trusts because its one of the only ways to access the trust funds without

penalty.
The next type of trust that I found to be a helpful inter-vivos trust, is a Bypass Trust also known as a Credit Shelter Trust. Although a Bypass Trust can either be testamentary or inter-vivos, the inter-vivos method provides more benefits to the grantor. Usually at death when the property is being transferred it is included in the gross estate and subject to estate tax, but if you create the trust inter-vivos you are able to access the lifetime gift tax credit. Having the opportunity to access the lifetime gift tax credit gives the grantor the opportunity to transfer up to $5,340,000 to the bypass without any tax consequences. This is also known as shielding the transfer, all property transferred to the bypass trust will escape federal estate taxation at the decedents death. Using an inter-vivos bypass trust benefits high net worth clients the most because it offers the opportunity to shelter over 5,000,000 from taxation.
The final type of trust I want to touch on is a Power Of Appointment Trust, this trust also has the opportunity to be an inter-vivos or testamentary. A Power Of Appointment Trust can be used for families wanting to use all of their marital deduction or a family wanting to avoid the generation-skipping transfer tax. In a Power Of Appointment Trust the owner has the opportunity to give a general power of appointment, which is inter-vivos, or a limited power of appointment, which is testamentary. Giving your surviving spouse the general power of appointment will allow them to have power over your assets during their lifetime. It will also qualify them for the unlimited marital deduction of $5,340,000 and help them avoid the generation-skipping transfer tax.
Trusts offer a unique investment opportunity, although the return on investment isn’t noticed in the grantors lifetime. It offers benefits to the family members mentioned in the trust; these benefits include tax savings and payments made to the family to help maintain the regular standard of living. Estate planning is one of the most overlooked financial planning techniques but its one of the most important because everyone eventually dies. When someone passes away without having a plan for the dispersion of estate assets it becomes a costly and time consuming mess for the remaining family members. Planning ahead and using a trusts can give the grantor the opportunity to pick and chose who gets what while sheltering their assets from taxes and the probate process.

Works Cited
1. Dalton, Michael, and Thomas Langdon. "Trusts." Estate Planning. 8th ed. St. Rose, LA: Money Education, 2014. 294-339. Print.