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Elements of a Trust
The entity created to hold assets for the benefit of certain persons or entities, with a trustee managing the trust (and often holding title on behalf of the trust).
Trustors, Settlors and/or Donors: Trusts are founded by people with these titles. Trustors, Settlors or Donors execute a written declaration of a trust which establishes the trust terms and conditions upon which it will be conducted and even sometimes managed.
Declaration: The declaration has the names of the original trustee or trustees, successor trustees or means to choose future trustees.
The assets of the trust are usually given to the trust by the creators, although assets may be added by others. During the life of the trust, profits and, sometimes, the Corpus (principal portion) may be distributed to the beneficiaries. In the future (such as the death of the last trustor or settlor), the remaining assets will be distributed to beneficiaries. A trust may take the place of a will and avoid probate (management of an estate with court supervision) by providing for distribution of all assets originally owned by the trustors or settlors upon their death.
There are numerous types of trusts, including "revocable trusts" created to handle the trustors' assets (with the trustor acting as initial trustee) This is often called a "living trust" or "inter vivos trust" which only becomes irrevocable on the death of the first trustor.
What is a Revocable Trust?
Also known as an "inter vivos trust. This type of trust is set up and can be revoked at any time before death of the Trustor/s, Settlor/s and/or Donor/s of this type of trust. Revocable living trusts are a common and excellent way to avoid the cost and hassle of probate, because the property held in the trust during life passes directly to the trust beneficiaries after the trust maker's death, without probate court proceedings. The successor trustee, the person appointed to handle the trust after the trust maker's death then transfers ownership to the beneficiaries named in the trust.
*Certain revocable living trusts can also reduce federal estate taxes.
Does having a revocable living trust reduce taxes?
No, not state tax. Michigan does not have an estate tax at this time. The federal estate tax is the same, regardless of whether assets are administered through a revocable living trust or a will. For the provisions of a living trust to control, a trust document must be prepared and your assets must be transferred to the trust during your lifetime. This can involve transfer costs and significant legal fees. But a living trust may reduce or eliminate court filing fees incurred after your death with a will that can add up. After death, both trustees of living trusts and personal representatives under wills require legal advice as to the proper payment of taxes and creditors, distribution to beneficiaries, document interpretation, and other directions so the proper payments are executed. In addition, a will is advisable even if you have a living trust to provide for the administration and distribution of assets not transferred to the trust during your lifetime. Note that the reasonableness of legal fees charged to trusts is judged by the same rules of professional conduct as legal fees charged to the estates.
A trust is an arrangement in which one or more people manage or take care of property for someone else's benefit. A living trust is a trust that is created during your lifetime. You transfer title to your property from your name to that of the trustee of the living trust. You can use the trust to gather your property under one document, so that the property is distributed efficiently after your death. NOTE: When you put your property into a trust, the trustee of the trust owns the property.
A trust is formed under state law. You may wish to consult the law of the state in which the organization is located (normally is best if located in your jurisdiction and is the legal serviecs is familiar with your state law - and partakes in continuing education in your state of your principal residence). Note that for a trust to qualify under section 501(c)(3) of the Code, its organizing document must contain certain language.
Legal entity created by a party (the trustor) through which a second party (the trustee) holds the right to manage the trustor's assets or property (bank accounts, securities, house, etc.) for the benefit of a third party (the beneficiary).
There are four main types of trusts:
(1) Living: trust created by the trustor while he or she is alive.
(2) Testamentary: trust established through a will and which comes into effect (is created) when the trustor dies.
(3) Revocable: trust that can be modified or terminated by the trustor after its creation.
(4) Irrevocable: trust that cannot be modified or terminated by the trustor after its creation.
Always talk directly to an attorney (estate planning specialist) before creating any type of trust.
What is a Living Trust?
A revocable living trust is created for the purpose of holding ownership to an individual's assets during the person's lifetime, and for distributing those assets after death. It is called a "living trust" because it is created and takes effect during the maker's lifetime, in contrast to a will, which does not take effect until after the death of its maker. The individual who creates the living trust (the grantor) gives control of his or her property to a trust, which is administered by the "trustee" for the "beneficiary's" benefit. The grantor, trustee and beneficiary may be the same person, with a successor trustee named to distribute assets after death.
A living trust is a legitimate estate planning device that for some people can be a useful and practical tool. But for others, it can be a waste of time and money, and not appropriate to individual estate planning needs. Contrary to some sales pitches, not everyone benefits from a living trust. Estate planning choices should be discussed with experienced estate planning professionals, including your attorney and financial planner.
What is a Testamentary Trust?
A testamentary trust established through a will and which comes into effect (is created) when the trustor dies. It is also subject to probate. See Wills Page
What is a Spendthrift Trust?
A spendthrift trust is when a direction of the settlor or statute, the beneficiary is unable to transfer his right to future payments of income or capital.
Creditors are unable to obtain the beneficiary's interest in future distributions from the trust for the payment of debts. Protecting the trust against the beneficiary's extravagant spending, and inability to manage his financial affairs.
Such trusts do not restrict creditors' rights to the property after the beneficiary receives it, but the creditors cannot compel the trustee to pay them directly.
What is a Supplemental or Special Needs Trusts?
Special needs trust also referred as a supplemental trust are frequently used to receive an inheritance or personal injury litigation proceeds on behalf of a disabled person in order to allow the person to qualify for Medicaid benefits. Assets in the trust are used for supplemental and extra care over and above what the government provides.