TRUSTS

TRUSTS

1. Definition

   • legal document
     • Defines assets held within it
       • Defines how those assets will be managed by a trustee for the benefit of a beneficiary (or beneficiaries)

2. Types

   • Living Trust
     • Assets pass to trust while settlor is still living; are revocable
     • Assets contributed by grantor (settler)
     • Grantor can be trustee and/or beneficiary
     • Beneficiary Receives Income and/or Corpus
   • Simple Trust
     • Must Distribute Income each Year
     • Distributable Net income (DNI)
       • Income from Dividends and Interest
       • Realized Capital Gains not reinvested
       • Less Expenses
   • Complex Trust
     • May accumulate and retain Income
       • Reach Highest tax Bracket Quickly
   • Revocable Trust
     • Terms of Trust May be Altered
       • Grantor Trust
     • Grantor Responsible for Tax on Trust Income
       • Grantor May Amend or Revoke
       • Assets Remain in Grantor's Estate
   • Irrevocable Trust
     • terms of trust may not be altered
       • May Avoid Estate Tax
     • Irrevocable life insurance trust (ILIT) is a popular example
   • Testamentary Trust
     • Setttlor retains control over assets until death
       • Assets pass through probate court prior to being placed in the trust
       • does not reduce a grantor's income or estate tax liability
         • Property passes into the trust by way of the will and must go through the probate court process
         • Per Stirpes passes to children of deceased beneficiary
         • If Interstate, administrator rather than executor

3. Common Objectives

   • Reduce Estate Tax Liability
   • Protect Property in an Estate
   • Avoid Probate in Court