Regardless of your purpose for creating a trust, that trust will need to be administered. Trust administration involves investment management, implementing charitable giving strategies, risk management, insurance planning and business succession planning, when applicable. The trustee you select to manage your trust and its administration will be responsible for carrying out the terms of the trust.
Trusts are useful in minimizing estate taxes and in avoiding costly probate. There are actually many benefits. But, when it comes to trust administration, it is equally important to understand what is involved and to select the right person or entity to serve as your trustee.
What is a trust?
Trusts are basically fiduciary agreements between a trustee and the grantor, who is the person making the trust. Fiduciary simply means the agreement is based on the trust and confidence. The trust document gives the trustee the authority to manage the trust assets and distribute them to the named beneficiaries pursuant to the terms of the trust agreement. A trust may be used in place of a will, or may be used in conjunction with a will where it only applies to certain property.
Common goals of a trust
As people accumulate their wealth, grow their retirement accounts, make their investments and purchase assets, they are developing an estate that has value. A properly drafted trust can transfer those assets to a trustee in order to accomplish many of common goals, such as protecting assets and ensuring their distribution according to your wishes, protecting your estate from significant taxation and transfer fees, managing your affairs in the event of incapacity, and facilitating charitable giving.
Trusts can satisfy many different objectives
The importance of trusts in estate planning is seen in their ability to minimize estate taxes and hopefully avoid probate. A trust is basically a fiduciary agreement, one based on trust and confidence, between the person making the trust (grantor) and the trustee. This agreement gives the trustee the authority to manage the assets of the trust and distribute those assets to the beneficiaries as specified in the trust agreement. There are several different types of trusts with their own objectives. Here is what you need to know.
The principal benefits of a trust
Trusts, like wills, are used to control your assets, including when and to whom your assets are distributed. A trust can also provide protection in situations where your beneficiary may not be as skilled at managing their own money. Having a trust can also mean that your estate will not need to go through the lengthy, public, and expensive probate process.
Revocable trusts and their benefits
All trusts are categorized as either revocable or irrevocable, which is an important distinction based on how the trust operates. A revocable trust, more commonly referred to as a living trust, provides the grantor with the ability to make changes to the terms of the trust, or revoke the trust altogether, at any time while they are still alive. After the grantor’s death, the trust becomes irrevocable. A revocable trust is flexible because it can be modified to account for changes in your circumstances or intentions. With a revocable trust, the trustee does not take control until after your death or incapacity.
Irrevocable trusts and their benefits
On the other hand, an irrevocable trust cannot be altered by the grantor after it has been executed. This characteristic can be very helpful. Once an irrevocable trust has been created, the trust assets are in effect out of the reach of creditors and the probate court. They are not subject to estate taxes either. Although you relinquish control over your assets when they are placed in an irrevocable trust, you gain favorable tax consequences. An irrevocable trust is commonly preferred over a revocable trust if the goal is to reduce estate taxes.
Other trust options
There are a few other types of trusts commonly used in estate planning. For instance, an Irrevocable Life Insurance Trust (ILIT) is designed to remove proceeds from life insurance policies from your taxable estate. Generation-skipping trust, in combination with the generation-skipping tax exemption, permits trust assets to be distributed to the future generations while avoiding the generation-skipping tax being imposed. A Qualified Terminable Interest Property (QTIP) trust is most commonly used to provide income for the surviving spouse. A Grantor Retained Annuity Trust (GRAT) is an irrevocable trust that is funded by gifts from the grantor. The purpose of this type of trust is to shift future appreciation on assets that appreciate more quickly to the next generation.
If you have questions regarding trust administration, or any other estate planning needs, contact the Northern California Center for Estate Planning and Elder Law for a consultation, either online or by calling us at (916) 437-3500.