A Guide to Trusts: How to Find the Right Trust for You


Trusts Revealed
 

A trust can be created for a variety of reasons. Some common reasons to create a trust are to achieve tax benefits, estate planning benefits, and asset protection benefits. Trusts are not one size fits all and any lawyer or non-lawyer selling you a binder of documents without asking the right questions is probably giving you a form and not a document tailored to your needs. A trust must be customized to carry out what it is that you want. It is important to understand the trust options that are available to you so you and your trust lawyer can customize a trust for your specific goals.


To help you through the maze of trust options we have prepared this report. You'll also be alerted to some options you might want to review with your trust or estate-planning lawyer. So lets get started.

Trusts can be described in a variety of ways, based upon when they are established, as well as the way that they operate.


For example, trusts are referred to as either Inter Vivos Trusts or Testamentary Trusts.

An inter vivos trust, commonly described as a Living Trust is established during the grantor's lifetime.

A trust is testamentary when it springs into life after the grantor's death, through his or her will. A testamentary trust does not avoid probate while a living trust does.

Trusts can also be Revocable or Irrevocable. A revocable trust is more flexible. The grantor (or person who creates the trust) can make any changes to the trust that he or she feels are necessary, any time, and can even cancel the trust altogether. An irrevocable trust is more "set in stone". The trust agreement may not generally be changed or terminated without court approval and or the agreement of all the beneficiaries.
NOTE: In Pennsylvania, the Uniform Trust Act (UTA) governs such changes.

Grantor Retained Annuity Trusts (GRATs) and Grantor Retained Unitrusts (GRUTs) provide special tax benefits. The grantor transfers highly appreciating assets to a trust at less than their full value, potentially removing the threat of estate tax on the future appreciation. With a GRAT the grantor decides on a set amount of income to be paid each year. With a GRUT payments are a fixed percentage of the value each year of the assets in the trust. There can be gift tax consequences to these trusts so consult an advisor.


A trust may also be defined by the purpose for which it has been established or for the kind of assets contained in the trust. We'll mention the most common ones for you.

A Qualified Personal Residence Trust (QPRT):
 

A QPRT is an irrevocable trust in which the grantor's principal residence or a vacation home is the only asset held by the trust. The grantor retains the right to live in the residence for a fixed number of years. Although a taxable gift is made when the property is transferred to the QPRT, if the taxpayer survives until the end of the trust term, the residence will go to the beneficiaries that the grantor has named, often his children, with no further tax consequences. This can result in large tax savings. However, because the home vests in children or other beneficiaries, careful thought and planning is required.


A Special Needs Trust/Supplemental Needs Trust (SNT):
 

The purpose of an SNT is to provide benefits to and protect the assets of a disabled person and still allow the person to receive governmental health and disability benefits. The trust is to supplement but not to supplant federal, state, local, or charitable benefits and services. Under such trust arrangements the trustee may provide the beneficiary with things for his or her welfare that are not otherwise available. An SNT could be used to provide the beneficiary with a vehicle and electronic equipment such as a computer, certain types of care, education, and lifestyle improvements.

A Self- Settled (SNT) Trust:
 

A self-settled trust, also known as a "first-party trust" is an inter vivos SNT that is funded with the beneficiary's own assets for their own benefit. A self-settled trust can be created when a disabled person wins a lawsuit and places the settlement into a SNT. This type of trust can also be created when an inheritance is placed into a SNT after the estate distributes it to a disabled person. This trust must be created by the disabled persons parent, grandparent, or guardian, or by the court and the disabled beneficiary must be under the age of 65. A self settled trust must be irrevocable. A self- settled trust might need a "payback" provision so it is not counted as an asset for governmental benefit purposes.
 

A Qualified Terminal Interest Property Trust (QTIP):
 

A QTIP is often used in a will where there has been a second marriage. For example, if a husband (who has children from a prior marriage) wants to leave an income flow to his second wife and then leave assets to his children, he will often us a QTIP trust.

Education Trusts:
 

With the mounting costs of education an education trust is a way to prepare for your child or grandchild's college or beyond while receiving estate tax benefits. Under section 529 of the Internal Revenue Code of 1986 there is a qualified tuition program, known as a 529 plan, which can be created without the use of a trust.

Pet Care Trusts/ Equestrian Trusts (ET):
 

A trust for the care of an animal including equestrian trusts used to be invalid because there was no human beneficiary but Pennsylvania now allows you to provide care for an animal that is alive during your lifetime. This is a great benefit for you if you own for example a beloved horse, dogs, or other pets and you would like them cared for after your death without burdening your loved ones.

Spend Thrift Trusts:
 

The purpose of a spend thrift trust is to prevent a creditor or assignee of the beneficiary from reaching the beneficiary's interest or distribution before the beneficiary receives the distribution. This allows you to protect assets from a divorce or lawsuit. However, in order to do this a spendthrift provision must be included which restrains involuntary and voluntary transfers of a beneficiary's interest. A spendthrift provision is unenforceable against a beneficiary who has a judgment or court order for child support.

Credit Shelter Trusts:
 

A credit shelter trust is also known as a bypass trust and may be a part of a comprehensive estate plan for married couples with a combined estate that exceeds the federal estate tax exemption. When one spouse dies an amount equal to or less than the federal estate tax exemption limit is put into the trust for the surviving spouse to use for health and maintenance. The remaining portion of the spouse's estate (below the exemption limit) passes outright to the surviving spouse or to a marital trust or QTIP. After the death of the surviving spouse the assets in the trust pass to the beneficiaries and the remainder of the surviving spouses estate passes to the beneficiary's. This simple technique can save families an enormous amount of taxes.

Trusts for Minors:
 

A trust for a minor provides the grantor with more flexibility in determining how the property or funds are managed and how and when they are distributed. A trust for a minor is often referred to as PUTMA (Pennsylvania Uniform Transfers to Minors Act). PUTMA allows a person to make a transfer by irrevocable gift to a custodian for the benefit of a minor until they are at least 21.

A Charitable Remainder Trust:
 

A charitable remainder trust allows the grantor or someone whom he or she designates to receive the income from the trust for the beneficiary's lifetime or for a period of years. When the income beneficiary's interest ends, the trust's assets pass to the designated charitable beneficiary.

A Charitable Lead Trust:
 

A charitable lead trust is similar to a charitable remainder trust. The charity receives the income from the trust and the trust assets later pass to the beneficiaries named by the grantor. In order to take advantage of the charitable deductions associated with the gifts made, charitable trusts are required to adhere rigorously to a set format.

An Irrevocable Life Insurance Trust (ILIT):
 

A life insurance trust is an irrevocable trust in which a life insurance policy is the main asset. At the grantor's death, the policy's proceeds pass to the trust for distribution to the beneficiaries according to the directions outlined in the trust agreement. As long as the grantor has given up all of his or her "incidents of ownership" in the policy, the proceeds are not considered part of his or her estate for federal tax purposes.

Conclusion
 

This is by no means, a complete list of all the trusts available to you but it is a good outline of the many different ways and purposes for a trust. A trust is a valuable tool in your estate planning, asset protection, and or for tax benefits.

If any of these trusts interest you or give you an idea for a trust talk to a trust lawyer and find out more so you can utilize all the trusts available to you to benefit your unique situation.

To find out more about the right trust for you:
 

1) Visit www.paestateplanners.com

2) Visit www.utbf.com/trust-estate

3) We have also written a guide to help you navigate through the technical and often confusing language involved in trust law. Read the entire article Lawyer Trust Language Decoded for Non-Lawyers

4) Call 610-933-8069 for a telephone conference or appointment with David Frees or one of the trust and estate lawyers at the firm

5) Email attorney David Frees at [email protected]

Whitney O'Reilly