A Trust can be a helpful tool in a person's estate and business planning. Technical issues can often get confusing, so a basic understanding of the different types of Trusts can be of help in deciding whether a Trust is appropriate in your situation.
Trusts come in different varieties: there are Revocable Trusts and Irrevocable Trusts; also there Testamentary Trusts and there are Intervivos Trusts (commonly referred to as Living Trusts).
A Revocable Trust, by far the more common, can be amended (changed) or revoked (cancelled, voided) by the person who established the Trust (this person is known as the Settlor, Grantor or Trustor). An Irrevocable Trust cannot be changed once it is signed. Transfer of assets to a Revocable Trust usually does not constitute a sale or exchange for income tax purposes; transfer of assets to an Irrevocable Trust usually is treated as a sale, exchange or gift, in which case applicable tax laws must be observed.
A Testamentary Trust is a Trust that is established after the death of the owner of the assets being placed into the Trust. A Testamentary Trust can be created by the terms inside a person's Will (this person is known as the Testator), or can be created by a court in various proceedings. A Living Trust (Intervivos Trust) is a Trust that is established by a person or persons during their lifetime. A Living Trust can also contain terms establishing a Testamentary Trust which becomes effective upon the death of the person who set up the Living Trust.
A Trust can be established for different reasons or purposes. If you have young children and want assets held and safeguarded on their behalf in the event of your death before they reach an age when they can properly handle the assets, a Testamentary Trust can be set up for that purpose. You can set up an Intervivos Trust for the same purpose if you wanted to gift the assets to your children now. If you want someone to receive income during their lives or for a specified period of time, but want the fund itself to then go to a charity or another person later, a Trust can be set up to accomplish that. If a disabled or otherwise incapacitated loved one would lose certain public benefits by receiving an inheritance or gift, a Special Needs Trust can be established now, or after your death, to allow that loved one to receive the gift or inheritance without losing benefits.
In any of these situations, a Trustee is named as the manager or administrator of the Trust and of the assets held by the Trust. Many times the person establishing the Trust names himself or herself as Trustee, but this is not a requirement. The person establishing the Trust (Settlor) also names a Successor Trustee should the Settlor resign, become incapacitated or die. For a Trust to be valid, there must be a Trustee, there must be a purpose for the Trust stated or implied in the Trust language, and there must be a corpus - the asset(s) being held in the trust (no specific amount is required). A Trustee can be a person, an institution or some other entity. The Trust may have any purpose that is legal under the laws of the state in which it is established. Although not a strict legal requirement in every situation, most Trusts are in writing.
Since the validity of a Trust is affected by whether it contains assets or not, it is important to realize that a Trust that is not funded (no corpus) is of little value and can even be said to be invalid. This becomes especially significant for people who seek to establish a Revocable Living Trust in order to manage their estate now and direct the distribution of their assets after death in order to avoid proceedings in probate court (known as the Orphans' Court in Pennsylvania). A Living Trust only governs assets that are actually delivered to the Trustee – the Trust must contain all of a person's assets to avoid probate. If only one asset of a person is not in the Living Trust, probate will not be avoided, unless the asset is jointly held with another or the asset bears a beneficiary designation. It is advisable that a person have a valid Will if his or her assets are to be administered through the Orphans' Court.
A Living Trust, often called a Grantor Trust, can provide that the person setting up the Trust will control Trust assets during his or her life and receive whatever income is earned from Trust assets. This Trust also will typically set forth how assets of the Trust are to be distributed upon the death of the Grantor (Settlor).
To determine if a Trust makes sense for you and your family, the best advice is to contact an attorney. It is always best to consult with an attorney who has experience helping people with estate and business planning when considering whether a Trust is appropriate. You and the attorney can discuss your goals, review your situation and then decide how best to accomplish your goals.
If you need an attorney and don't have one, the Lawyer Referral and Information Service can help.
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