A trust is an important document in a comprehensive estate plan and allows someone to hold assets for the benefit of their spouse, their children, or even their pets! There are many kinds of trusts serving different planning functions. As such, there are several considerations to account for when creating a trust.
Let’s start with definitions of the various parties involved:
- The grantor, also known as the settlor or trustor, creates the trust and transfers ownership of assets into the trust. They define the trust’s terms, including how the assets should be managed and distributed.
- A beneficiary is an individual designated to receive the benefits or assets from a trust. They may receive distributions and have a say in certain decisions, depending on the terms of the trust. They have “beneficial ownership” of assets in a trust, but not direct ownership.
- The trustee is a person or entity responsible for managing the assets held in the trust. They have a fiduciary duty to act in the best interests of the beneficiaries and follow the grantor’s intention per the trust’s terms.
Given the role of the trustee, determining the trustee is an important decision when creating a trust. There are a few different types of trustees:
- A corporate trustee is a bank or trust company. They have experience in trust administration, investments, and financial management. Likely the most expensive of the options but professional.
- An individual trustee is a single person designated to oversee the trust. This could be a family member, trusted friend, or advisor. Likely the most cost effective of the options but may not be familiar with the fiduciary requirements of being a trustee.
- A family trust company (“FTC”) is a family-owned and controlled entity set up to act as corporate trustee for trusts of a particular family lineage. FTCs are authorized by state statute, but not all states have created these laws. Ohio has statutes authorizing FTCs and they are frequently utilized by families who own a family business, are doing multigenerational wealth planning, or are setting up a large number of trusts. This option can combine the best characteristics of a corporate trustee and an individual trustee – knowledgeable about the family members and professional. The FTC is also in control of its budget so may be cost effective.
Grantors can frequently identify who they want to serve as the current trustee but thinking about who will assist future generations when doing long-term planning takes thoughtful consideration.
Types of Trusts You Can Create
Selecting the type of trust that is most beneficial to an individual or family’s situation depends on their tax and estate planning needs. The two main types of trusts are:
- A revocable trust, also sometimes called a living trust, allows the grantor to retain control over the assets in the trust until disability or death occurs. The trust can be changed or amended during the grantor’s lifetime. Upon the death of the grantor, a revocable trust becomes irrevocable. However, assets held in a revocable trust upon the grantor’s passing are included in the grantor’s estate.
- An irrevocable trust is frequently set up to move assets out of the grantor’s estate – as well as the estates of beneficiaries, if specifically drafted. Assets held in an irrevocable trust can be a life insurance policy, family business ownership, or legacy assets not needed to fund the grantor’s lifestyle. Irrevocable trusts can also offer protection from creditors, including in divorce proceedings.
Why Create a Trust?
There are many reasons to create a trust including:
- Probate avoidance – Assets held in trusts avoid probate, which is a publicly recorded court process that takes time and money. Assets in a revocable trust maintain privacy, save money, and most importantly, save time spent in court and filing piles of paperwork for your family.
- Control of your legacy – Trust terms dictate when assets are distributed to beneficiaries. Assets passing by Will are distributed to beneficiaries when they reach the age of majority, generally at eighteen years old. A trust allows the grantor to specify ages over time for distributions or even hold the assets in trust for the beneficiary’s lifetime.
- Minimizing estate taxes – Assets held in irrevocable trusts are designed to pass wealth through succeeding generations without incurring estate taxes. Currently, a grantor can pass $15M of assets to future generations using an irrevocable trust without paying gift taxes.
Information provided in this article is general in nature, is provided for informational purposes only, and should not be construed as financial, tax or legal advice.
