By Daphne Stern, Esq.

In my last article, I discussed the reasons that virtually everyone needs to have a will and estate plan (“Why Do I Need A Will?” September 13). This week, I will focus on a versatile and useful estate planning tool — the trust. Trusts can be beneficial for people with more modest assets, as well as for individuals with higher net worth.

A trust is a legal entity giving a third party (the “trustee”) title to property, to be held for the use or benefit of another (the “beneficiary”). A trust is created by the owner of the property (the “grantor”) in a written document which contains the terms that the trustee is obligated to uphold. It will designate the trustee, identify the beneficiaries, state the duration of the trust, set forth the conditions upon which the trustee may make payments to the beneficiaries, and include other terms that are particular to the situation and type of trust. The trust can be created during one’s lifetime in a separate agreement (an “inter-vivos trust”) or upon death by trust provisions contained in one’s will (a “testamentary trust”). What does this mean in practice and who should actually create a trust?

There is a myriad of trusts that may be used to carry out different goals. A person may create a trust to avoid probate, to reduce estate taxes, to manage funds for a young beneficiary, to plan for the protection of a child with special needs, or to effectuate charitable goals. I will discuss some of the more common trusts relevant to many people in our community.

The living trust, or revocable trust, is basically a substitute for a will. Property is transferred to the trust during the grantor’s life. He may amend or revoke the trust at any time. The grantor of the trust may receive income and principal and may act as trustee. In the case of incapacity, the grantor ceases to act as trustee, and another individual (or institution) that he has named in the document will act as trustee in his place. This ensures that there will be a person of the grantor’s choice managing his property if he is unable to do so himself. Upon the grantor’s death, all property in the trust will be distributed as the grantor directed in the document. Assuming that all of the person’s property is held in the trust, there is no need for probate in surrogate’s court. This is beneficial when a person desires privacy, since a will that is filed in court becomes a matter of public record. This is also desirable in states such as Florida, where probate is costly and very lengthy.

A life insurance trust is another planning device which may be beneficial. Many people do not realize that life insurance proceeds are included in the value of their estate for estate tax purposes. Estate tax is a tax imposed upon one’s property at death on both a federal and state level. While currently the threshold for federal estate tax is very high ($11.4 million), New York estate tax is imposed upon estates with a value of $5,740,000 or greater. Although this New York exemption sounds like a significant figure, it is not that high when one adds the value of a residence, securities, and retirement accounts to the value of the life insurance policy. One of the simplest ways to reduce one’s estate for tax purposes is to put the life insurance in a trust. The trust will state who will receive the proceeds after your death. If properly drafted, life insurance held in trust will not be included in a person’s estate for estate tax purposes.

A trust may also be useful to provide for a child or grandchild. Each individual may make annual gifts in the amount of $15,000 per recipient without the imposition of gift tax (yet another tax imposed by the U.S. government). Both the husband and wife may make such gifts for a total of $30,000 per recipient, or one of the spouses may make a gift of $30,000 and “split” the gift between the husband’s and wife’s exemptions. When a person makes such gifts, he is also reducing his taxable estate, which is obviously desirable. However, what if the child or grandchild (or other recipient) is young or is not able to manage his or her own money?

While a person may set up a Uniform Transfers to Minors Act (UTMA) account for the child, this becomes the child’s property at age 21. Most young people are not able to invest and manage funds responsibly and successfully at that age. A possible solution would be to hold the money in trust for the child. The trust could specify the ages that a child receives partial payouts, and set forth the circumstances in which the trustee may make distributions for that child’s benefit (education, health needs, to buy a home, etc.) during the term of the trust. Similarly, a person may wish to create a trust under his will for any young children or grandchildren. Other reasons to hold a child or grandchild’s share in trust is to provide protection against a child’s creditors, particularly if the child is a professional and could be the subject of a malpractice lawsuit, or to safeguard these amounts in case of divorce.

There are other important reasons to create trusts. If a family has a child with special needs, a trust is essential to avoid jeopardizing government benefits. Charitable goals can be effectuated with trust arrangements. Various techniques for reducing estate taxes may be implemented through the use of trusts. A trust can help a person achieve his goals, minimize taxes, and protect his family. The process does not have to be complicated, but the consequences can be far-reaching.


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