Trusts

This week the topics are centered around estate planning. As mentioned yesterday, a living trust as part of a will can be used not only to transfer assets and avoid unnecessary taxes, but also can be used to make decisions regarding health care while still living.

To take a closer look at trusts, let's cover the basics first. A trust is an agreement under which money or other assets are held and managed by one person for the benefit of another. Different types of trusts may be created to accomplish specific goals. Each kind may vary in the degree of flexibility and control it offers.

The common benefits that trust arrangements offer include:

• Providing personal and financial safeguards for family and other beneficiaries;
• Postponing or avoiding unnecessary taxes;
• Establishing a means of controlling or administering property; and
• Meeting other social or commercial goals.

A trust is created by a settlor (may also be referred to as the "grantor," "donor", or "trustor") who entrusts some or all of his or her property to people of his choice, namely the trustees. The trustees are the legal owners of the trust property (assets such as stocks, bonds, real estate, business, etc.), but they are obliged to hold the property for the benefit of one or more individuals or organizations which are called the beneficiaries, usually specified by the settlor. The trustees owe a fiduciary duty to the beneficiaries, who are the "beneficial" owners of the trust property.

Because of the different kinds of trusts, let's look at some of the basic purposes. Once the purpose is clearly defined, the proper type and particulars can be included.

Common purposes for trusts include:

1. Privacy. Trusts may be created purely for privacy. The terms of a will are public and the terms of a trust are not. In some families this alone makes use of trusts ideal.
2. Spendthrift Protection. Trusts may be used to protect one's self against one's own inability to handle money. It is not unusual for an individual to create an inter vivos trust with a corporate trustee who may then disburse funds only for causes articulated in the trust document. These are especially attractive for spendthrifts. In many cases a family member or friend has prevailed upon the spendthrift/settlor to enter into such a relationship.
3. Wills and Estate Planning. Trusts frequently appear in wills. A fairly conventional will, even for a comparatively poor person, often leaves assets to the deceased's spouse (if any), and then to the children equally. If the children are under 18, or under some other age mentioned in the will (21 and 25 are common), a trust must come into existence until the contingency age is reached. The executor of the will is usually the trustee, and the children are the beneficiaries. The trustee will have powers to assist the beneficiaries during their minority.
4. Charities. In some common law jurisdictions all charities must take the form of trusts. In others, corporations may be charities also, but even there a trust is the most usual form for a charity to take. In most jurisdictions, charities are tightly regulated for the public benefit.
   
5. Unit Trusts. The trust has proved to be such a flexible concept that it has proved capable of working as an investment vehicle.
6. Pension Plans. Pension plans are typically set up as a trust, with the employer as settlor, and the employees and their dependents as beneficiaries.
7. Corporate Structures. Complex business arrangements, most often in the finance and insurance sectors, sometimes use trusts among various other entities (e.g. corporations) in their structure.
8. Asset Protection. The principle of asset protection is for a person to divorce himself or herself personally from the assets he or she would otherwise own, with the intention that future creditors will not be able to attack that money, even though they may be able to bankrupt him or her personally. One method of asset protection is the creation of a discretionary trust, of which the settlor may be the protector and a beneficiary, but not the trustee and not the sole beneficiary. In such an arrangement the settlor may be in a position to benefit from the trust assets, without owning them, and therefore without them being available to his creditors. Such a trust will usually preserve anonymity with a completely unconnected name (e.g. "The Teddy Bear Trust"). The above is a considerable simplification of the scope of asset protection. Some asset protection is legal and moral, while some asset protection is illegal and/or immoral.
9. Tax Planning. The tax consequences of doing anything using a trust are usually different from the tax consequences of achieving the same effect by another route (if, indeed, it would be possible to do so). In many cases the tax consequences of using the trust are better than the alternative, and trusts are therefore frequently used for tax avoidance, or avoid paying unnecessary taxes.
10. Tax Evasion. In contrast to tax avoidance, tax evasion is the illegal concealment of income from the tax authorities. Trusts have proved a useful vehicle to the tax evader, as they tend to preserve anonymity, and they divorce the settlor and individual beneficiaries from ownership of the assets. This use is particularly common across borders — a trustee in one country is not necessarily bound to report income to the tax authorities of another.
    
11. Money Laundering. The same attributes of trusts which attract legitimate asset protectors also attract money launderers. Many of the techniques of asset protection, particularly layering, are techniques of money-laundering also, and innocent trustees such as bank trust companies can become involved in money-laundering in the belief that they are furthering a legitimate asset protection exercise, often without raising suspicion.
12. Co-ownership. Ownership of property by more than one person is facilitated by a trust. In particular, ownership of a matrimonial home is commonly effected by a trust with both partners as beneficiaries and one, or both, owning the legal title as trustee.

As mentioned earlier, a living trust is part of a will and are created during the lifetime of the settlor. 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 settlor). Such trusts are widely used because they allow the settlor to designate a trustee to provide professional management. This is done through designating a durable power of attorney who will legally act on your behalf in the event of death or incapacity. With respect to health care, this person decides on issues concerning the settlor’s health when it comes to the point when the settlor cannot make health care decisions on his own.

Living trusts can be "revocable" or "irrevocable." The settlor may change the terms or cancel a revocable living trust, but not an irrevocable one. Upon revocation, the settlor resumes ownership of the trust property.

In creating a trust, you should consider several factors and obligations, including:

• Your personal situation, including age, health and financial status;
• Your family relationships and your family's financial circumstances;
• Personal financial data: personal property, real estate holdings, securities, and other property — as well as your tax situation and any debts or obligations;
• The purpose of the trust: your goals, or what you hope to accomplish by the arrangement;
• The type of trust, and how versatile or flexible your plans are.
• The amount and type of property it will contain;
• The duration, or how long the trust will last;
• The beneficiaries and their specific needs;
• Any conditions that must be met by a beneficiary to receive benefits (such as attaining a certain age);
• Alternatives for disposing of assets in case the trust conditions are not met or circumstances change; and
• The trustee, and the conditions or guidelines under which he or she will function.

Dependency exemptions, capital gains and losses, income, gift, estate and generation-skipping transfer taxes also should be considered when planning certain types of trusts. Likewise, you may want to think about naming alternative or contingent beneficiaries and trustees. 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.

Once a trust has been established, a periodic review of the status of the trust is advisable; you may want to obtain professional assistance appropriate to the requirements of the 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.

Other fees can also be applicable. A trustee's fee may vary with the skill and expertise the trustee offers. There also may be accounting, real estate management or other service fees. Other common charges include annual, minimum, withdrawal and termination fees.

There will be more information tomorrow regarding these and other estate planning techniques. Stay tuned ...

Guard my life, for I am devoted to you. You are my God; save your servant who trusts in you. Psalms 86:2 (NIV)

If you have comments or questions, please feel free to contact me at the address below.
Email: DeltaInspire@panama-vo.com