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Use of Trusts in Estate Planning

October 29, 2021 | Category: Articles, Asset Protection, Corporate and Taxation, Estate Planning and Probate

Trusts are used for a variety of purposes in estate planning. A trust is a legal relationship in which one person (the trustee) holds legal title to property for the benefit of another (the beneficiary).

The settlor is the person who creates and funds the trust.

The beneficiaries are the people who will benefit from the trust property or who hold a power of appointment over trust property (i.e., have the authority to dispose of trust property).

The trustee is the person who administers the trust and manages the trust property.

A trust is created when a property owner (the settlor) transfers legal title of assets to a person (the trustee) who has the duty to hold and manage the assets for the benefit of one or more persons (the beneficiaries). The property transferred into the trust is known as the trust principal, trust estate, or trust corpus.

A trust can be written into a will and take effect when the maker of the will (testator) dies.  Or it can be created in a separate written document and can take effect when the settlor transfers property to the trustee.  A trust that takes effect while the settlor is alive can be revocable or irrevocable.  If it is revocable, the settlor can change it or undo it at any time, so long as he or she is mentally competent.  An irrevocable trust cannot be changed or undone.  A trust that takes effect when the settlor dies is irrevocable.

What Can a Trust Accomplish in an Estate Plan?

Property management for minor or incapacitated beneficiaries. A trust that takes effect on a parent’s death enables parents to appoint a trustee to handle a child’s inheritance until the child is older. It avoids the costs and hassles of a guardianship. Similarly, trusts can be used to manage the property of legally incapacitated adults.

Probate avoidance. A person can transfer title to all his or her assets to a revocable living trust. The person can retain full control over the assets by naming himself or herself as the trustee. When the person dies, the assets are distributed to the beneficiaries as provided in the trust. If no assets are in the person’s name when he or she dies, no state court probate proceeding is needed to transfer title to the beneficiaries.

Guardianship avoidance. A revocable living trust can name a successor trustee to take over management of the trust assets if the settlor becomes incapacitated. Without a living trust, if a person were to become incapacitated, then it is likely that his or her property would be managed through a court-supervised guardianship, which will be more expensive.

Creditor protection. A trust can include a spendthrift provision that can prevent a beneficiary's creditors from reaching the beneficiary's interest in the trust. With a spendthrift provision, a beneficiary may not transfer an interest in the trust, and, except in special situations, a creditor of the beneficiary may not reach the interest or a distribution from the trust before the distribution is received by the beneficiary.

Tax planning. Trusts can be used to minimize estate and income taxes. For example, a marital deduction trust allows couples to defer estate tax until the death of both spouses. A bypass trust allows the most efficient use of both spouses’ lifetime gift and estate tax exemptions. Irrevocable trusts can transfer wealth from a parent’s estate without giving the beneficiary-child immediate control over assets. Irrevocable trusts can also be used to make charitable gifts, thus reducing income and estate taxes.  Life insurance trusts can be used to reduce estate taxes by removing the life insurance proceeds from the estate.


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