Below, please find a brief overview of some of the advantages and disadvantages of trusts. While they are not appropriate for everyone, they can be extremely versatile vehicles that protect and preserve assets and eliminate problems that arise during life and after death. The three main reasons people utilize trusts are to minimize estate, gift and income taxes, preserve and protect family’s assets during life and after death and address complex family dynamics, such as controlling who may manage or have access to the assets (prevent elder abuse and mismanagement).
What are Trusts?
Here’s the big picture: A trust is an incredibly valuable and versatile tool to accomplish many of your estate and business planning objectives. Basically, you create a separate legal entity that owns and administers property for the benefit of certain beneficiaries. One or more trustees are appointed to administer the trust pursuant to the document’s precise instructions. They must adhere to the instructions at the risk of being held personally liable. That’s why trustees are called fiduciaries, because they are subject to a higher standard of care in exercising their duties. Because trusts are separate legal entities, they do not “die” like people do. In fact, they can last up to 360 years in Florida! Since they can own virtually any type of property for a very long time without interruption, trusts ensure a smooth transition of family and/or business assets or wealth to subsequent generations. All the while the creator can still retain a fair amount of control over the property far beyond the time of death.
Read more about trusts here.
Click here for a relatively short video overview.
- organizes estate assets by owning assets in a unified entity with clearly defined beneficiaries and managers (trustees).
- avoids probate and guardianship if properly utilized which can save a lot of time, energy, frustration and money.
- ensure smooth transition in the event of incapacity, which like probate is something to avoid. It’s also fairly humiliating given the nonprivate nature of those proceedings.
- control all details relating to the disposition of assets after death (i.e. who receives income and principal, how often, in what form, for what reasons, and subject to what conditions).
- designate the one or more managers of the trust after you’ve passed away.
- protect the beneficiaries’ interest in the trust estate from themselves if financially irresponsible and from their creditors that may emerge (including a spouse). (Click here to read how trusts are like toothpaste tubes..)
- keep assets in the family for generations (add conditions and exclusions)
- not overly too restrictive given the discretionary nature of the standard for making general distributions.
- no asset protection benefits until irrevocable (by way of death and not because of the grantor’s revocation of rights to amend and revoke by amendment).
- unfavorable income tax treatment of undistributed income once the trust becomes irrevocable. This can be avoided by investing prudently or distributing the income to the beneficiaries who will pay the tax at their personal rates.
- exercise a degree of control “from the grave” which some people find unsettling (usually the people who cannot manage their own assets).
- slightly more expensive to form.
- additional administrative work to transfer title of assets to the trust during life.
- potential administrative fees from professionals (attorney and CPA). Legal fees should be compared with the costs of estate administration.
- trustee is entitled to “reasonable” compensation if not expressly addressed in the trust.
Barry E. Haimo, Esq.
Strategic Planning With Purpose
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