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Trusts are not just for the super-rich. We tend to associate trusts
with robber barons, charity balls and thrice-divorced socialites,
but the uses and types of trusts are so varied that some type of
trust is apt to be appropriate for all of us at some point. Trusts
are most commonly used to provide for a relative without giving
that person property outright, but trusts can also support pets,
scholarships, memorials or research -- almost anything.
A trust is simply an arrangement under which one person manages
property for the benefit of another. The manager is the "trustee"
and the one benefited is the "beneficiary." The person
setting up the trust is the "trustor."
A very simple, common trust is the trust
bank account: A (often a parent) in trust for B (often
a child). The parent opening the account is both trustor and trustee;
the child is the beneficiary. Often called a Totten trust, this
account remains under the parent's complete control as long as he
or she lives. The parent (trustor and trustee) can withdraw money,
close the account or change the beneficiary, even in his or her
will. The child gets the money in the account when the parent dies,
if the child is still the beneficiary.
A Totten trust is a type of living or "inter vivos" trust.
A living trust is one that goes into effect while the trustor is
alive, in contrast to a testamentary trust, which is made in a person's
will and takes effect after his death. Living trusts may be classified
as "revocable" or "irrevocable," depending on
whether the trustor retains the power to change or revoke them.
The classification is important because only an irrevocable trust
saves or shifts taxes.
Property in a revocable trust is treated
for tax purposes as still belonging to the trustor. (The logic behind
the rule is that a person hasn't really given something away if
he can take it back whenever he wants.) Interest earned on a Totten
trust account is still taxed to the trustor, and the balance would
be counted in his estate for tax purposes.
What good is a revocable trust?
- It can avoid probate costs, delays, and
publicity. Trust assets are not included in the probate estate
for purposes of calculating the fees of attorneys or the personal
representative, nor in determining the type of probate administration
necessary. Trust property usually passes more quickly to beneficiaries
than probate property. Unlike probate court files, trust documents
and property do not become part of the public record.
- It can smooth the transfer of financial
management from an elderly person without the need for guardianship
or conservatorship proceedings, or permit the trustor to test
the ability of the prospective trustee, guardian, or personal
representative.
Irrevocable Trusts. Through an irrevocable
living trust you can reduce taxes as well as avoid probate and transfer
financial management. You can also retain some use of trust property.
Property put in an irrevocable trust is no longer yours. The property
isn't counted for estate tax purposes, and you don't pay income
tax on interest earned by the property unless it is paid to you.
Through a charitable trust you can take an immediate tax deduction
for stocks or real estate and still receive dividends or live in
the house. (The amount of the deduction depends on your life expectancy.)
Assuming the property has appreciated in value, you avoid tax on
the gain as well.
There are many special types of trusts with fancy names that try
to combine the tax advantages of an irrevocable trust with the flexibility
and control of a revocable one. Don't establish anything but a Totten
trust without consulting your lawyer, but don't assume trusts are
only for the very wealthy.
To find a lawyer in
your area, complete the online form.
Source: National Resource Center for Consumers of Legal Services.
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