Chipman Mazzucco Emerson Estate Planning and Elder Law

Trusts offer many advantages including asset management, protection from creditors and protection from taxes at more than one generation level. They can be drafted in a variety of ways. Trusts can be used as a gifting tool, established during life, or included in a Will, to be established after death. What type of trust a client will use will depend on the situation including the ages, abilities and resources of the beneficiaries of the trust.

For example, if you are married and considering making a large gift while the gift tax exemption is $5,000,000, the gift could be to a trust which includes your spouse (as well as children, grandchildren and even younger generations) as a beneficiary. This type of trust is frequently called a “Spousal Access Trust.” Your spouse could be a Trustee of the trust (ideally with one or more other Trustees) and your spouse could receive benefits from the trust. As a result, the income need not be totally lost to your household (at least as long as your spouse is living).

The terms of your Spousal Access Trust could grant your spouse significant powers to determine how the trust assets and income would be used to provide benefits for other beneficiaries, including the power to dispose of the trust assets according to the terms of your spouse’s Will (so long as the power is properly limited). If properly drafted, the trust would be sheltered from estate, gift and generation skipping tax at the time of your spouse’s death and at the deaths of your children and their children.

Trusts can also be included in your Will as an important tax-saving device. For a discussion about the potential tax-saving features of trusts, go here: January 10, 2010 post.

In addition, a trust may be the best way to provide a benefit for someone who is not up to managing assets. For example, trusts can be used to protect trust assets from a beneficiary’s creditors and to exclude trust assets from consideration if the beneficiary needs to apply for government assistance (like Medicaid to help cover the costs of long-term care). For more information about this type of trust, go here: Special Needs Trusts.

Trust Basics – What You Should Know

(1) Trust assets are managed by a Trustee (a person or bank) for the benefit of others. The beneficiaries, therefore, do not have control over the trust assets. A Trustee, however, must account to the beneficiaries for its actions. It is generally preferable to give a Trustee broad discretion (limited, however, by prudence) regarding investment decisions. Often, depending on circumstances, a Trustee may also be given broad discretion to decide how benefits will be divided among members of a class of beneficiaries.

(2) Depending on the client’s goals, the trust can be drafted to severely limit beneficiary influence and access or to generously maximize the beneficiary’s influence and access.

(3) The most important decision regarding the use of a trust is the identity of the Trustee. The Trustee must, among other things, be meticulous about keeping separate and complete records, prudent with respect to investments, sensitive to the needs of the beneficiaries and fair in its dealings with both the trust and all beneficiaries.

(4) The management of trusts involves some expense relating to the Trustee’s compensation, court costs and legal fees.

(5) A trust can be drafted containing an endless variety of provisions to accomplish many different goals.

Posted on 2/10/2011 by Kasey S. Galner, Associate, Chipman, Mazzucco, Land & Pennarola, LLC.

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Notice: To comply with U.S. Treasury Department rules and regulations, we inform you that any U.S. federal tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction, tax strategy or other activity.



This entry was posted on February 10, 2011 at 3:06 pm and is filed under Estate Tax and Estate Planning Developments. You can subscribe via RSS 2.0 feed to this post's comments.

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