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What is a Trust ?

A trust is a fiduciary arrangement that allows a third party, or trustee, to hold assets on behalf of a beneficiary or beneficiaries. Trusts can be arranged in different ways and can specify exactly how and when the assets pass to the beneficiaries. Trusts usually try to avoid the administration of estates process, as trust beneficiaries are able to gain access to trust assets more quickly than they would be able to if these assets were to be transferred in terms of a will.

Furthermore, in the case of an irrevocable trust, trust assets may not be considered part of the taxable estate, meaning fewer taxes will be due upon your death. As assets in a trust are able to avoid the administration of estates process, time is saved and estate taxes are potentially reduced.

What are the benefits of a Trust?

One has control of trust assets and to whom distributions are made. You may elect to set up a revocable trust, which allows the assets in the trust to remain accessible to you during your lifetime, whilst designating to whom the remaining assets will pass upon your death – such trusts are able to make provision for even complex situations, such as when there are children from more than one marriage.

A properly constructed trust can help protect one’s estate from the creditors of one’s heirs, or from beneficiaries who may not be adept at money management.

Due to trusts allowing assets to avoid the administration of estates process, both taxes and the cost of any litigation are likely to be lower.

Different types of Trusts

Marital  Trust These are designed to provide benefits to a surviving spouse. They are generally included in the taxable estate of the surviving spouse.
Testamentary Trust These are outlined in a will and are created through the will after the testator’s death, with funds subject to the administration of estates process and transfer taxes. These often continue to be subject to court supervision thereafter.
Irrevocable life insurance Trust (ILIT) These irrevocable trusts are designed to exclude life insurance proceeds from the deceased’s taxable estate while providing liquidity to the estate and/or the trust’s beneficiaries.
Charitable Lead Trust Allows certain benefits to go to a specified charity and the remainder to your beneficiaries.

Remainder Trust

Allows one to receive an income stream for a defined period of time and stipulate that any remainder go to a specified charity.
Generation-skipping Trust These make use of the generation-skipping tax exemption, which permits trust assets to be distributed to grandchildren or later generations without incurring either a generation-skipping tax or estate taxes upon the subsequent death of your children.
Qualified Terminable Interest Property (QTIP) Trust These are used to provide income for a surviving spouse. Upon the spouse’s death, the assets go to additional beneficiaries named by the deceased. These trusts are often used in second marriage situations, as well as to maximize estate and generation-skipping tax or estate tax planning flexibility.
Grantor Retained Annuity Trust These are irrevocable trusts funded by gifts from its grantor. They are designed to shift future appreciation on quickly appreciating assets to the next generation during the grantor’s lifetime.

Revocable vs Irrevocable Trusts

Revocable Trust: Also known as a Living Trust. A revocable trust can help assets pass outside of the administration of estates process, whilst allowing one to retain control of the assets during one’s (the grantor’s) lifetime. They are flexible and can be dissolved at any time, should one’s circumstances or intentions change. A revocable trust typically becomes irrevocable upon the death of the grantor.

One can name oneself as Trustee (or co-trustee) and retain ownership and control over the trust, as well as its terms and assets, during one’s lifetime, whilst still making provision for a successor trustee to manage these in the event of your incapacity or death. Although a revocable trust may help avoid the administration of estates process, it is usually still subject to estate taxes. Furthermore, during your lifetime, the trust is treated like any other asset you own.

Irrevocable Trust: An irrevocable trust typically transfers one’s assets out of one’s (the grantor’s) estate and potentially out of the reach of estate taxes and the administration of estates process. However, these cannot be altered by the grantor after they have been executed. Therefore, once one has established the trust, one will lose control over the assets and be unable to change any trust terms. Furthermore, one will not be able to decide to dissolve the trust.

An irrevocable Trust is generally preferred over a revocable trust if one’s primary aim is to reduce the amount subject to estate taxes by effectively removing the trust assets from one’s estate. Also, as the assets have been transferred to the trust, one is relieved from the tax liability in respect of the income generated by the trust assets (although distributions will typically have income tax consequences). One may also be protected from adverse legal judgments.

Deciding on a Trust

The laws pertaining to trusts are comprehensive and nuanced, which one should be cognizant of when making any decisions about a trust. Choosing and creating a trust can be a complex process – the guidance of an attorney with estate planning expertise is highly recommended.

Prepared by:

Arthur Johannes | Consultant | Trust and Estates

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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