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Glenn W. Magnell Attorney at Law 162 Main Street, Goshen N.Y. 10924 845-294-0585 Email: gmagnell@stormkinglaw.com
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Hudson Valley Counties Served: (Select County) |
The Role of Trusts in Estate Planning Trusts are an important tool in many estate planning strategies. They are primarily used to insure that beneficiaries and heirs receive property and use property in accordance with the wishes of the “trustor” (the party that originally owned the property). What is a Trust?A legal agreement under which any kind of asset (money, property, stocks, etc.) is held and managed by one person for the benefit of another is called a Trust. There are a variety of different types of trusts that can be created depending upon what purpose the trust is intended to accomplish. Trusts can offer a variety of benefits, including: 1. Protecting assets from certain types of taxes, particularly estate taxes 2. Safeguarding financial or family assets and preserving them for beneficiaries 3. Providing a means of controlling how assets are used even after one’s death 4. Achieving desired, long term charitable goals How are Trusts Created?All trusts have certain aspects in common with each other. Creating a legal trust requires naming a Trustor (the party creating the trust), a Trustee (the party managing the trust), a Beneficiary (the party or parties whom the trust is intended to benefit), the Trust Property (the property transferred from ownership by the Trustor to ownership by the Trust), and a Trust Agreement defining all of the above and defining terms as to how the Trust will operate, what it can and can’t do, etc. A valid Trust trust must hold title to some property. The trust property can be any type of asset, including stocks, real estate, cash, a business or insurance. Trust property may also include some future interest or right to future ownership, such as the right to receive proceeds under a life-insurance. Property is made subject to the trust by transfer to the trustee, commonly called a "gift in trust." What Kind of Trusts Are There?There many different kinds of trusts, each different type of trust has advantages and disadvantages. The type of trust selected is primarily driven by the object that the Trustor wishes to accomplish. Often trusts are described in terms of the relationship to the Trustor's life. Thus, there are “Inter Vivos” trusts (created during the life of the Trustor) and Testementary Trusts (created upon the death of the Trustor).Inter Vivos Trusts (also known as Living trusts) are created during the lifetime of the trustor. Property held in a living trust is not normally subject to probate (the court-supervised process to validate a will and transfer property on the death of the trustor). In New York, because such property is not subject to probate, it need not be disclosed in the court record and confidentiality may be maintained. Such trusts are widely used because they allow the trustor to designate a trustee to provide professional management. Testamentary trusts are created as part of a will and must conform to the statutory requirements that govern wills. This type of trust becomes effective upon the death of the person making the will (the "decedent") and is commonly used to conserve or transfer wealth. The will provides that part or all of the decedent's estate will go to a trustee who is charged with administering the trust property and making distributions to designated beneficiaries according to the provisions of the trust. Assets intended for a testimentary trust typically pass through the decedent's estate. Those trust assets will be subject to probate when the estate is probated. These kind of trusts are often used because they give the trustor a high degree of control over distributions from his or her estate. Testementary trusts can also be used to achieve significant future savings. Through a testamentary trust, a trustor can plan for a child's education or can assure that property is not transferred to a child until the child is capable of wisely managing their finances. Moreover, given the proper form of trust, property may be exempted from death taxation on the later death of a trust beneficiary. There are exception to this, however, and a special tax on generation-skipping transfers may still apply. Trusts that are not testementary trusts can be estblished so that they are either "revocable" or "irrevocable." A revocable inter vivos trust permits the trustor to change the terms or cancel the trust. If and when revoked, the trustor resumes ownership of the property held by the trust. In general, a revocable trust is used when the trustor does not want to lose permanent control of the trust property. A carefully drafted revocable trust allows for the trustor to: 1. Add or withdraw some assets from the trust during the lifetime of the trustor; 2. Change the terms and the manner of administration of the trust; and 3. Retain the right to make the trust irrevocable at some future time. The assets in this type of trust will generally be includable in the trustor's taxable estate, but may not be subject to probate. In contrast, irrevocable trusts cannot be changed or terminated by the trustor once the trust is created. However, there are some advantages associated with irrevocable trusts: 1. Depending up the way the trust is set up the income may not be taxable to the trustor; and 2. Assets held by the trust may not be included in basis used to calculate estate taxes of the trustor's estate. The impact of irrevocable trusts on potential estate taxes is a very complex area of tax law. For example, benefits may be lost if the trust permits the trustor to (1) receive any income; (2) use the trust assets; or (3) otherwise control the administration of the trust in ways that may conflict with the Internal Revenue Code. A testamentary trust may be changed or canceled at any time prior to the trustor's death. Since testamentary trusts are created as part of the execution of a will, revisions can be made by drafting a new will or by using a simple document called a "codicil". How Are Trusts Established?Trusts involve a number of complex legal concepts related to ownership, taxes and control. An attorney familiar with estate and trust law, along with IRS regulations can assist by explaining options, contingencies and preparing documents. In creating a trust, you should consider several factors and obligations, including: your age, health and financial situation. In addition, your family relationships, your potential estate tax liability, the goals you have for the trust, conditions you may want to impose on beneficiaries, who you would want to manage the trust and how much control you wish to retain after creating the trust. Dependency exemptions, capital gains and losses, income, gift, estate and generation-skipping transfer taxes also should be considered when planning certain types of trusts. What Responsibilities Does a Trustee Have?A trustee — whether an individual or institution — holds legal title to the trust property and is given broad powers over maintenance and investment. To ensure that these duties are properly carried out, the law requires that the trustee act in a certain manner. In general, a trustee must:
The trustee must administer the trust property only for the designated beneficiaries and may not use trust principal or income for his or her own benefit. In other words, a trustee is usually prohibited from borrowing or buying from the trust, from selling his or her own property to it, and from using the trust assets as collateral for a personal debt. In selecting a trustee you should consider the potential trustee's competence and experience in managing business or financial matters and the potential trustee's availability and willingness to serve. Individuals and certain corporations (or a combination of both) may serve as trustee. Each selection offers distinct advantages and drawbacks that should be considered. For example, an institution, such as a bank, usually offers specially trained managers to provide administrative, counseling and tax services. Other typical advantages include the institution's continuity and reliability of service, and its ready availability. Most banks charge a fee for trust services, and some may not want to manage small trusts, so you may want to compare options. As an alternative, an individual, such as a relative, family friend or business associate, may serve as trustee. An individual, unlike an institution, may be willing to serve for little or no fee. Furthermore, this person could add a more personal touch for special understanding to the needs of the beneficiaries. However, you will want to be certain that any nominated individual has the skill and experience necessary to properly manage the trust property. What Are Insurance Trusts?Insurance trusts may take various forms, such as business insurance trusts (which may be used to protect the "key men," proprietor or partners of a business), or personal insurance trusts (which involve no business interests). These types of trusts are usually intended to provide assistance in the management of insurance proceeds from estate taxation. Insurance trusts may be revocable or irrevocable, and various types of agreements are available to accommodate an individual's circumstances and desires, or the requirements of a business. Another form of insurance trust is the life-insurance trust. This trust, similar to a living trust, is created to receive proceeds payable under a life-insurance policy. It is normally established to exclude those proceeds from taxation in the decedent's estate. A life-insurance trust can also be used to provide a vehicle for continued management and distribution of insurance proceeds for a beneficiary who may need assistance in those matters. To obtain the tax benefits of having the proceeds excluded from the decedent's estate, it is imperative that the insured divest himself or herself of all interest in the policy, and place those rights in the hands of the trustee. For this reason, it is preferable to have an individual other than the insured act as trustee. This type of trust cannot be revocable, and the insured cannot retain any right to trust income. To ensure the tax advantages are retained, it is important that the document be properly drafted. The tax rules in this area are quite complex, so professional legal assistance may be helpful in the preparation of such a document. What are Charitable Trusts?A charitable trust is intended to‚ immediately or eventually, benefit members of the general public. It can offer many tax advantages to the trustor not available to other trusts. Unlike private trusts, it can be established to last indefinitely. Although sometimes complicated in their arrangement, charitable trusts offer considerable flexibility in providing benefits from the trustor or other trust beneficiaries, while at the same time meeting charitable goals. Charitable trusts must be carefully drafted, however, to ensure advantageous tax treatment. A commonly used charitable trust is the "charitable remainder trust." What is a Charitable Remainder Trust?This type of trust allows you to give a future interest in an asset to charity, while keeping an income stream for yourself or for another beneficiary. A trustor may specify that a certain portion of the trust income be distributed to a noncharitable beneficiary for a certain period of time, with the charity to receive the money or property thereafter (e.g., upon the death of the noncharitable beneficiary). In addition to offering an immediate tax deduction for the charitable contribution, the charitable remainder trust can help lower your estate taxes. To qualify for a charitable deduction, specific formats must be followed, and the charitable beneficiary must meet standards set by the Internal Revenue Service. The amount of the charitable deduction is based on complex tax laws that consider such factors as the age of the beneficiary, the value of the property, and the expected income from the trust. Because of the detailed legal concepts and changing IRS regulations, it is advisable to consult a lawyer when considering such arrangements. How Long can a Trust Last?There is no specified time during which a trust must remain in effect. Each situation must be evaluated separately. In general, however, New York State law will not allow a private trust to continue longer than 21 years after the death of a person living at the time the trust was established. Charitable trusts, on the other hand, may continue indefinitely. What are the Tax Implications of a Trust?The use of a trust may help you achieve certain goals, such as reduction of taxes. However, while trusts can offer a number of tax advantages, tax avoidance should not be the sole motivation for using this estate-planning tool. It also should be recognized that the laws governing trusts and their taxation are complex and subject to change. As an example, under the Tax Reform Act of 1986, income earned in a trust which has a beneficiary under the age of 14 will be taxed at that beneficiary's marginal tax rate. This is a significant departure from prior tax law, which provided that such income be taxed to the child at his or her own tax rate, often resulting in little or no tax being due. Because of the new tax rules, an individual contemplating a trust for tax purposes should consult with his or her accountant or attorney to determine whether the trust can be structured in a way to meet the tax objectives. By carefully choosing the proper type of investments within a trust, it may still be possible to accomplish tax goals, but careful planning and drafting are required. These facts, coupled with the numerous financial considerations involved in estate planning, suggest that professional legal and financial assistance may be necessary to help you make an informed decision. What are the Fees and Costs Associated With a Trust?The cost of creating and administering a trust can vary considerably, depending on its type and duration. A lawyer's fees to create a trust, for example, will usually be based on the time involved in consulting with you, and in planning and preparing documents. Therefore, before you hire a lawyer, you should discuss fees (for example, whether hourly or flat fees are charged). Ask for an estimate or arrange a written fee agreement. A trustee's fee may vary with the skill and expertise the trustee offers. Charges may also be influenced by the size and complexity of the trust estate. This affects the nature and amount of services required, such as record-keeping, asset management and tax planning. In addition to legal and trustee expenses, there may be accounting, real estate management or other service fees. Other common charges include annual, minimum, withdrawal and termination fees.
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