A trust is a management device that separates the legal title of property from its beneficial interest. A trust is generally a written document created by a settlor (also referred to as a grantor), either during the settlor’s lifetime or in a last will and testament, that provides instructions and authority for a trustee to manage the trust’s property for the benefit of a beneficiary. While there are many types of trusts and extensive reasons to create a trust, a few important estate planning objectives utilizing trusts are the following:
- Incapacity Planning and Avoiding Probate – Trusts created during the settlor’s lifetime can serve a dual purpose: as both a property management device during a period of incapacity or as a will substitute at death. Furthermore, utilizing a trust as a will substitute avoids additional costs, time, and privacy concerns associated with probate and is particularly efficient to transfer title to any out-of-state real property owned by a settlor, avoiding the need for ancillary probate.
- Professional Asset Management and Discretion – A settlor can shift management responsibility of trust assets to a professional trustee, such as a bank or trust company, who are subject to a fiduciary duty to manage the trust’s property for the benefit of the beneficiary. A settlor can also direct that certain beneficiaries, such as a minor or disabled individual, be subject to delayed or different rights to the income and principal of the trust’s assets. Other trust provisions can provide the trustee with discretion over outright distributions of trust assets, such as when a beneficiary has substance abuse issues or when a beneficiary requires a spendthrift provision to protect against creditors.
- Transfer Tax Planning – For individuals subject to federal and/or state estate tax obligations, trusts provide flexible planning options to minimize transfer taxes, including generation-skipping transfer taxes, for generational wealth planning. While the current federal estate and gift tax exemption is $12,920,000, unless Congress acts prior to January 1, 2026, this exemption is scheduled to revert to $5,000,000, indexed for inflation from 2011. Trusts are an effective way to utilize this increased federal exemption amount prior to any reversion, without requiring an outright gift of property to a beneficiary.
Finally, a trust is only effective if property is contributed to the trust. It is crucial that, after creation, the settlor follows through by contributing and properly titling assets into the trust. Otherwise, the time, effort, and money spent creating the trust will be for naught.
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Trevor Johnson is a trust and estates attorney focused on advising closely-held business owners. He can be reached at (941) 867-2374 or [email protected]