Using trusts effectively

Their use allows persons to transfer assets to family members, or others, while retaining some control over those assets. But don’t look at trusts as simply a way to reduce taxes; given the changes in laws the establishment of trusts has more to do with the management of assets than it does with tax savings these days.

As with powers of attorney, trusts evolved under English common law; there is no statutory definition of a trust. Generally speaking, a trust is a relationship between two parties; the person or persons who hold the property (the trustee(s)) and another person or persons (the beneficiaries) for whose benefit the property is held. The relationship is said to be “fiduciary” (the Latin word for trust was fiducia). This means that the trustee owes a duty of “utmost good faith” to the beneficiaries.

The person who puts ((settles) property into the trust, referred to as the settlor, creates the trust. The settlor must transfer property to the trustee with the clear intention of creating a trust relationship, as opposed to a gift of property, for example. It can be made clear that a trust relationship is intended usg a formal trust agreement, a will, or a beneficiary designation.

It is important to note that the settlor and the trustee do not need to be different people – they can be one and the same person. A spouse, a third party, or a trust company (or several of these acting together) could be designated as the trustee. The trustee holds legal title to the settled property. The beneficiary is considered to be the beneficial owner of the settled property. The trust assets can include real property (real estate), and tangible or intangible personal property.

While more expensive to set up than, say, a will, a trust can be established for a cost of about $2,000. One of the reasons why they are relatively inexpensive to establish is that trustees are partially compensated from the trust’s annual income.

There are three ways to create a trust:

1) By means of a distinct trust agreement

2) A clause within a will establishing the trust

3) A simple beneficiary designation within an insurance policy

Subsequent articles in this series will deal with the specifics of trusts in greater detail.