TRUSTS

OVERVIEW
There are many different kinds of trusts that serve a multitude of purposes. Trusts are not just for wealthy people; they may be helpful to just about everyone. The simplest form of a trust is a living revocable trust which is a trust that allows you to be your own trustee as well as beneficiary during your lifetime. Such a trust will keep your assets contained within the trust from having to go through probate, thereby lowering your estate's expenses, speeding the settlement of the estate, and affording you more privacy than you would have if all your assets passed through probate. Other kinds of trusts serve various purposes from tax avoidance to caring for people with special needs.

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WHAT IS THE DIFFERENCE BETWEEN A TESTAMENTARY TRUST AND A LIVING TRUST?
A testamentary trust is a trust that is specifically written into your Will; it springs into being when you die. The disadvantage of this kind of a trust is that by being a part of your Will, the law requires that the probate court supervise the trust for as long as it is in effect. This eliminates many of the advantages of a trust such as privacy, speed of administration and reduced costs. A better way for many people is a "pour over Will" that is separate from your trust that pours over into a separately existing trust written during your lifetime any assets not already into the trust. In this way your trust avoids probate.

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WHAT IS THE DIFFERENCE BETWEEN A LIVING TRUST AND AN INTERVIVOS TRUST?
An intervivos trust is just the Latin name for a living trust. A living trust is just the name for any trust which you have created while you are alive as contrasted to one that is contained within your Will and does not become effective until your death.

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IF I HAVE A TRUST DO I STILL NEED A WILL?
Yes. A trust supplements but does not replace a Will. It is often the case that there are assets that never make it into the trust, such as assets you aquire shortly before death. Without a Will to pour these assets into your trust, your probate will most likely be more expensive and more complicated... which defeats the primary purpose for having the trust in the first place. In addition, a Will is needed to name an Executor to settle your final affairs, pay your taxes and debts and otherwise see to the closing of the estate.

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HOW DO I AVOID ESTATE TAXES?
The most effective method is to avoid dying. This eventually proves difficult, however, for most people. The second most effective method is to structure your estate planning documents to take advantage of every applicable exemption and deduction allowed by the IRS. This may entail setting up trusts, skipping generations in your bequests, and making certain gifts before you die. The methods are different for every situation, and it is vital to have your documents prepared by an attorney who keeps abreast of the applicable regulations and strategies.

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WHAT IS A QUALIFIED DOMESTIC TRUST?
Currently, no taxes are imposed on transfers to one's spouse. However, this important deduction does not apply if the surviving spouse is not a United States citizen unless a trust with some very specific language is used. This trust is referred to as a Qualified Domestic Trust. This trust has specific legal conditions that must be met in order to be effective, but is very helpful where a surviving spouse is not a citizen.

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WHAT IS A SPECIAL NEEDS TRUST?
Relatives of people with disabilities often will find that trusts provide tremendous long term benefits for their disabled family members. A trust can be used to protect the assets from creditors and place control of the assets in individuals or institutions chosen and trusted by the creators of the trust, while allowing the beneficiaries of the trust to become eligible for public benefits.

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WHAT IS A QTIP TRUST?
A QTIP trust is a form of marital deduction trust often used by couples who may have children from previous marriages. A QTIP trust can avoid estate taxes while providing income for a surviving spouse for his or her lifetime. At the death of the surviving spouse the assets remaining in the trust will pass to the children of the creator of the trust.

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WHAT IS A CHARITABLE REMAINDER TRUST?
There are many variations of charitable remainder trusts, but generally they allow you to set up a trust that may pay you or other members of your family income for life. At the death of the beneficiaries the remaining trust assets will pass to the charity of your choice. When you set up the trust you will receive an income tax deduction that can be used to reduce your current income taxes. You may also save on taxes by putting into the trust stocks that were purchased at a low price, but have increased significantly in value. Your charitable remainder trust can sell these stocks without having to pay a capital gains tax which will also help you avoid considerable income taxes. Often people will use the income tax savings from the charitable deduction and avoidance of capital gains taxes to purchase life insurance for their heirs to replace the assets going into the charitable remainder trust. Most often this life insurance is held by an Irrevocable Life Insurance Trust. For details on this kind of a trust see the specific Web site section on Irrevocable Life Insurance Trusts.

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IS IT IMPORTANT TO PUT ASSETS INTO MY TRUST DURING MY LIFETIME?
Placing your assets into your trust during your lifetime is very important. In the case of the simplest form of trust, the living revocable trust, in order to avoid probate it is necessary that your assets be placed into the name of your trust during your lifetime. Operating such a simple trust where you can be your own trustee and beneficiary is not complicated. You can use your own social security number as the tax identifying number for the trust and need not file separate federal income tax returns for the trust. Rather, you merely include the trusts's income on your own federal income tax return. In the case of marital deduction credit shelter trusts it is critical that your trusts be properly funded in order to avoid estate taxes. If you set up marital deduction trusts, but kept title to your assets in joint names with your spouse, you would not be able to utilize the tax saving provisions of your trust. It is imperative once you have created a trust to discuss with your attorney the steps necessary to properly fund the trust.

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If you would like more detailed information on Trusts, please contact the firm. That attorneys at Hargrove & Rea, P.C. will be happy to answer any questions you may have.