About Trusts Middlesex County

About Trusts

When people talk about trusts, it is usually difficult to really pin down what they are talking about. Most people have heard the term “trust fund” but when pressed to explain what that really is, most of us can’t do it. With that in mind, the point of this article is to explain the history of trusts, outline the basic types of trusts and finally address the operation of trusts.


This information is not presented as legal or accounting information. It is presented as a common-sense guide from a professional estate advisor and analyst point of view.


The History of Trusts

The concept of the trust has been around longer than most people realize. As the story goes, the very first trust dates back to the days of the Roman Empire – about 800 A.D. In that society, only citizens of Rome could own property. When faced with deployment, soldiers would transfer ownership of their property to a trusted friend to make sure their families were cared for. During the Roman occupation of the British Isles, the trust became a familiar tool to protect lands from rogue governors and lords. The concept of the trust arrived on American soil along with the colonists.


Trusts were once regarded only as a tool available to the ultra-wealthy. While this was true for many decades, there has been a proliferation of use of these flexible and powerful planning tools. People have discovered that trusts can be useful for almost any socioeconomic class.

The Structure of a Trust

Every trust must have four primary elements. The first element is the trust maker – the person who makes the trust. This person can also be called the “Grantor” or “Settlor.” The second element is the person who manages the trust assets and performs the functions of the trust. This person is called the “Trustee” and can sometimes be the same person as the trust maker or can be a professional or institutional trustee. There are more levels of trusteeship. For instance, when the original trustees are deceased or no longer to serve, then another person is appointed to take their place. That person is called the “Successor Trustee.” The third element is the person or class of persons who will benefit from the existence and operation of the trust. This person is called a “Beneficiary” and the original beneficiary is sometimes the trust maker, however in many types of trusts the trust maker is not the beneficiary. After the trust maker is deceased, then normally their children become the next line of beneficiaries. Of course, if more than one person exists, they are called “Beneficiaries.” The final element consists of the assets inside the trust. These assets are called the trust “Corpus.


These elements are completely interdependent - no trust could exist if even one of these elements did not exist.


Types of Trusts

Trusts can be formed in literally thousands of configurations. The uses are almost unlimited. Despite these almost limitless possibilities, there are only four major types of trusts – Revocable, Irrevocable, Testamentary and Living. Some advisors would mention Domestic trusts and Offshore trusts, but even these must fit within these four classifications.


Revocable Trusts - This type of trust can be amended, added to or revoked during its maker’s competent lifetime. After the maker is deceased, this type of trust typically becomes irrevocable.


Irrevocable Trusts - These trusts can’t be changed after they are made. There are many uses for irrevocable trusts – like funding legacies for children or grandchildren. Others might use an irrevocable trust to make gifts of property or life insurance.


Testamentary Trusts - This is the type of trust that is typically included in a person’s Will. A testamentary trust goes into effect only after its maker has deceased. This trust could also be considered a revocable trust because your Will can be changed at any time during your lifetime.


Living Trusts - Any trust that takes effect during the maker’s lifetime is considered a living trust. Most people – and sometimes even legal professionals – misinterpret the distinctions presented here. People are often heard talking about “living trusts” when they really mean “revocable trust.” Sure enough, the revocable trust is typically a living trust, but irrevocable trusts are very frequently living trusts, too!


The distinction here is important because you need to have a thorough understanding of the terminology before you can have an understanding of what these trusts can or can not do.


Common Uses for Different Types of Trusts

While we’re discussing the common uses for trusts, let’s address the most common type of trust first – the Revocable Living Trust.


For most families, this trust acts much like a Will – its primary purpose is to distribute assets to the beneficiaries after the trust’s makers are deceased. That’s about where the similarities between the Will and revocable living trust end, however.


The revocable living trust’s ability to avoid probate is often the primary reason families use them for distributing assets. Many generalist attorneys argue against making a revocable living trust and encourage their clients to have their estates settled through the probate process. This mindset is in direct conflict with the national organizations that support specialist estate planning attorneys. The National Network of Estate Planning Attorneys supports the notion that most people benefit from a revocable living trust – based estate plan. The American Academy of Estate Planning Attorneys lists the revocable living trust as its number one estate planning strategy.


Why does a revocable living trust avoid probate? That’s a good question. The answer is that all of us are not going to be living at some point in the future. If we have assets titled in our names, then those assets will need to be probated so they can go to our heirs. If we have a revocable living trust, the assets are already out of our name. And even though we will all be deceased at some point, the trust lives on. In essence, when you fund your living trust (retitle your assets into the name of your trust), you have performed what some refer to as a “living probate.”

 

View Source

 

Want to read more?
Come see our latest news!
Click Here

About Trusts Middlesex County

Email Sign Up

Submit your email to reserve our monthly tax tips.

Licensed both in New Jersey and New York, the practice focuses on small and medium-sized businesses including restaurants. We specialize in working with professionals like attorneys and doctors where our attention to detail and sound accounting practices has provided significant benefits to our clients. Our office is located in New Brunswick.
Contact us by contact form or call (732) 846-1700 to schedule an appointment.