THE TRUST

A trust is an arrangement between a person and a “trustee” to provide for the benefit of a specified person or persons (the “beneficiaries”). A person establishes a trust by transferring property to the trustee with specified instructions for the maintenance and distribution of the transferred property and any earned income to the beneficiary or beneficiaries.

One major advantage of a trust is its inherent flexibility.

A person establishing a trust is afforded great leeway in structuring the investment and distribution provisions of a trust, and therefore may direct the distribution or nondistribution of income or principal. A person may also state the purpose or purposes for which any distribution is to be made.  For instance, even though a trust is often established to provide for the “support” of the named beneficiary, if a person so desires, he or she may provide for other concerns which may exceed the legal definition of “support”; i.e., education, comfort, happiness, travel, etc.

Since a person may also direct the time at which the trust property shall be distributed to the named beneficiary, a person can utilize a trust to preserve property for persons other than minors.  In other words, a trust can be established for an individual who, even though over the age of eighteen, may not be adequately responsible or prudent to manage property and finances.

Furthermore, a trust may include “spendthrift” provisions which prevent the trust assets from being assigned by a beneficiary or from being “attached” by a beneficiary’s creditors.

Who should serve as TRUSTEE?

Family members and close friends are often appointed as TRUSTEES. Their perceived familiarity with the beneficiaries may permit them to more adequately determine when and among whom distributions are to be made, and may provide more of a “personal touch” to the role of trustee.

However, because of the complexity of the trust assets, or because of the conflicting interests of the beneficiaries, the “personal” needs of the beneficiaries may have to yield to the expertise of specialized professionals.  Sometimes, a person may be able to achieve a perfect blend of available personal and financial qualities by appointing two or more persons to simultaneously serve as “CO-TRUSTEES.”  In any event, as with the appointment of an executor, a person should also appoint a successor trustee or trustees should the initially appointed trustee be unable to undertake or continue his or her trustee duties.

DIFFERENT TRUSTS FOR DIFFERENT REASONS.

Managing Property for minors or other persons either legally or mentally incapable of doing so.

Parents wishing to leave property in trust for their children often ask whether to set up several trusts, one for each child, or to set up one “family” trust which will serve all children.

Some people wish to achieve a quantifiable degree of fairness in their distribution of property, and thus prefer an immediate equal division of property with the individual shares passing to separate trusts for each child. In such a case, each child gets an equal portion of the parents’ property.

But, what happens if an individual child’s needs exceed his proportionate share of the parents’ property.  What if a child develops an unexpected health problem?  Or, what if a child’s education ambitions include attending an expensive northeastern private institution? 

If that child’s needs are in excess of the property in his or her trust, tough luck!  Since that child is not a beneficiary of the other separate trusts, he or she has no access to the assets in those trusts.

Or, let’s assume that there is a large age difference between children.

(let’s say one child is 25 and the other is 12)

The parents have provided $20,000 toward the older child’s college education, and the parents now have $100,000 to be left to the children. If both parents pass away leaving property in separate trusts, each child will receive $50,000.  But, the younger child will have to apply $20,000 of his or her trust property toward the cost of a college education, whereas the older child has already received his or her college education, and without any reduction in his or her share of the estate.  Therefore, the younger child will in essence receive $30,000, while the older child receives $50,000. Some parents do not think that this is a fair division of their estate.

In each of these cases, parents often choose to leave their assets in a “family” trust naming all children as beneficiaries.

That way, the entire estate remains available to satisfy the needs of each child, regardless of whether or not the amount distributed to one child exceeds his or her proportionate share of the estate.  When the basic support or other desired needs of all children have been met (let’s say, when the youngest child has completed his or her college education or has reached age 23), the “family” trust assets are divided equally among the children.  At that time, the trustee may be directed to distribute to a child his or her proportionate share outright, or additional provisions may be added directing the trustee to further hold a child’s proportionate share in trust until a time when he or she reaches a designated age or level of maturity.  Any distributions from a child’s separate trust after the division date will reduce only the property in that child’s separate trust.  But, since the basic support needs of all children have already been met, it is not unfair to utilize solely that child’s assets for that purpose.

But, remember, a trust may be used to not only protect an individual from himself or herself, but may also be used to protect an individual from others.

For example, if a person receives property outright, that property in most instances will be subject to the claims of the person’s creditors.  Or, one spouse may be particularly concerned with the ultimate disposition of property should the surviving spouse remarry.  Or, even though spouses may at one time mutually agree on the ultimate disposition of their property upon their deaths, one spouse may feel that the surviving spouse may subsequently change his or her will to totally circumvent the previously agreed to estate plan.  In each of these cases, property may be left in trust to provide for the benefit of the intended beneficiary without exposing the trust assets to others’ claims.

 


 

We hope that the above discussion has brought to light many of the issues which must be addressed in the estate planning process. It is intended for informational purposes only and to assist a client in his or her general understanding of the estate planning process. We do not intend for this to be an exhaustive discussion of all issues involved.  Nor do we intend for this information to be a substitute for legal advice.  However, if you have any questions about any of the above information, or if you need additional assistance with your estate planning, please feel free to contact us.