A ‘trust’ is a legal entity that allows someone to transfer the legal title of that asset to one person while assigning the benefit of the asset to another. The person who creates the trust, the original owner of the asset, is known as the ‘grantor’. The person who manages the trust is known as the ‘trustee’, and the person who receives the benefits is known as the ‘beneficiary’.

The trust’s grantor names a trustee to handle investments and manage trust assets. Depending on the type of trust, the grantor can retain the right to make some or all decisions regarding the trust.

A trustee may be an individual such as an attorney or accountant, or a trustee may be an entity that offers experience in such areas as taxation, estate tax law and money management. Trustees have a responsibility — known as ‘fiduciary responsibility’ — to act in the beneficiaries’ best interests.

Trust Categories

Trusts are drafted as either revocable or irrevocable and may take effect during a person’s lifetime or after death.

Revocable trusts can be changed or revoked at any time. For this reason, the Government considers any trust assets to be included in the grantor’s taxable estate. This also means that the grantor must pay income taxes on revenue generated by the trust and possibly estate taxes on those assets remaining at the time of his or her death.

Irrevocable trusts cannot be changed by the grantor once they are executed. The assets placed into a properly drafted irrevocable trust are generally removed from a grantor’s estate for tax purposes. Depending on the terms of the trust, income and capital gains taxes incurred by the trust may be paid by the grantor or by the trust and/or the beneficiaries. Upon a grantor’s death, the assets in the trust generally are not considered part of the estate and therefore are not subject to estate taxes.

Most revocable trusts become irrevocable at the death or disability of the grantor.

Benefits of a Trust

Although trusts can be used in many ways, they are most commonly used to:

• control assets and provide security for both the grantor and the beneficiaries

• provide for beneficiaries who are minors or require expert assistance managing money

• minimise the effects of estate or income taxes

• provide expert management of estates

• minimise probate expenses

• maintain privacy

• protect real estate holdings or a business.

Most people use trusts to help maintain control of assets while they are alive and medically competent, as well as to control disposition of assets if they are medically unable to do so or in the event of death.

Trusts Offer Flexibility

Different kinds of trusts are designed to meet different needs and objectives. The examples that follow are some of the types that may be available to you.

A living trust allows the grantor to remain both the trustee and the beneficiary of the trust while he or she is alive. Upon death, a designated successor trustee manages and/or distributes the remaining assets according to the terms set in the trust, avoiding the probate process for assets in the trust. In addition, should the grantor become incapacitated during his or her lifetime, the successor or co-trustee can take over management of the trust.

An irrevocable life insurance trust is often used as an estate tax-funding mechanism. Under this trust, the grantor makes gifts to an irrevocable trust, which in turn uses those gifts to purchase a life insurance policy. Upon death, the policy’s death benefit proceeds are payable to the trust, which in turn provides tax-free cash to help beneficiaries meet estate tax obligations.

Considerations for Estate Planning

Although estate planning often is viewed as a concern for older individuals with substantial means, it is a subject that almost everyone needs to address. Even if your assets are limited to a residence, bank accounts and perhaps stock option or bonds, you want to be sure that the people you wish to receive them do indeed become their owners and that your plans are executed with the greatest efficiency and least expense possible. If you have complicated personal relationships — for example, children from more than one marriage, a dependent parent or relative, or offspring whose financial resources vary greatly — leaving clearly explained directions for distributing your assets might prevent potential disputes among your heirs. However, if the value of your estate is not significant, or your assets are limited and straightforward — for instance, your residence and financial accounts — creating a trust to avoid probate may not be beneficial and could cost more than it is worth to create and manage.

Although the use of wills can also be costly, trusts can involve costs that are more substantial. Using a trust entails legal expenses and the cost of transferring property titles to the trust. There are also expenses for ongoing asset management and legal compliance.

Written by Venice Williams, Partner/Attorney Lewis, Smith, Williams & Company. Email: vwilliams@lswlegal.com