A trust can be defined as a relationship that is set up where one person holds property for the benefit of another. This relationship is typically set up in a document called a trust agreement, or in a will. A will sets up a trust at someone’s death, whereas a trust agreement typically sets up a trust relationship immediately during the lifetime of the grantor, the person that sets up the trust. We can help you set up a trust.
A trust defines rules for the use and distribution of the assets in the trust:
The trust agreement, or the section of the will that creates a trust, essentially sets up the rules that the trustee, the person in control of the trust, has to go by when distributing the assets of the trust to the beneficiary, the person who receives the benefit of the trust.
The assets in the trust are essentially any form of property that can be dispersed. If you had a bank account that was in your individual name and you contribute that bank account to a trust, it’s still a bank account. The only difference is that you change the name on the bank account to the name of the trustee (e.g., John Jones as trustee of the XYZ trust instead of your name) and that, from then on, those assets are governed by the rules of the trust.
There are many reasons to set up a trust. Most people set up a trust in order to ensure legal protection for their assets or for the assets they are giving to someone else. The most common type of trust is a revocable trust. That’s where multiple parties, normally a married couple, contribute their assets into a trust that is designed to pass the couple’s property at death. This type of trust works much like a will does, except the trust passes ownership of the assets immediately at death, instead of having to go to court and probate the will. With a revocable trust, your beneficiaries don’t have that waiting period.
Another benefit of a revocable trust is that it’s more private than a will, because there’s no public proceeding that has to occur in order to pass the assets and because there’s no inventory that’s filed in the court when you die. A revocable trust can also can help in the event that there is a will contest case, because the capacity requirement that’s needed to sign a trust is not quite as high as it is with a will.
With a will, there’s a public court proceeding called a probate. The will has to be filed for probate, and everybody named in the will gets notice that there’s some document out there that passes title. Whereas with the trust, because it never has to be probated, it’s a little harder for contesting beneficiaries to find out about the fact that there is a trust in existence.
Another very common trust that we set up is a bypass trust. When people have a large amount of assets, typically over $5 million in assets, we set up a bypass trust in their will, so that when one of them dies the assets don’t pass to the surviving spouse outright. Instead, they go to what’s called a bypass trust. We put this type of trust in place to reduce, or even sometimes eliminate, the imposition of estate taxes.
As of 2015, when you die, you’re allowed to pass $5.43 million to anybody you want, free of estate taxes. If your estate is over $5.43 million, then there’s a 40% tax that’s incurred by the overage. Anything that’s over the $5.43 million, is subject to that taxation rate and goes to the government.
Here’s why we set up a bypass trust:
Let’s say a married couple living in Texas has a $10 million estate. Because Texas is a community property state, each spouse technically has a $5 million estate. If one spouse dies and they have willed their $5 million to their spouse outright, she now has a $10 million estate. There is what is referred to as an “unlimited marital deduction”, which means you can pass an unlimited amount of money to your spouse and there’s no estate tax imposed.
However, the problem in this case is, now the spouse has a $10 million estate. Remember, as of 2015, anything over $5.43 million is subject to an estate tax. When she dies, almost $4.5 million is going to get taxed at that 40% estate tax rate.
To avoid this problem, we use a bypass trust. When one spouse dies, their $5 million gets contributed to the bypass trust. The surviving spouse, as trustee of the bypass trust, now has the benefit and use of those funds until she dies; however, the trust assets are not included in the surviving spouse’s estate at death. The remaining funds are then passed to their children free of estate tax. The $5 million estate of the second spouse to pass away can also pass to their children free of estate tax. So, you can use both spouses’ exemptions instead of only one of them.
We recently did a post on special needs trusts. These are incredibly important to consider if you or someone you know, has a special needs child.
However, some children are not necessarily a special needs case, but still need supervision when it comes to financial matters. These children typically fall into the category of what is commonly referred to as a “spendthrift”, someone who is not good with money. There are several issues parents have to deal with in this case whether a child spends too much money, develops an addictive behavior, or has some other extenuating circumstance. Parents can put that child’s funds into a trust, and name a trusted person as the trustee to manage the assets for that individual.
In every will, we have what’s called a contingent trust. A contingent trust is a trust that gets set up in case assets are going to pass to a minor or to a very young adult. You don’t want to give very young adults their inheritance outright because they probably won’t be responsible enough to handle it. If the child is under 18, the law prevents them from directly receiving an inheritance. The minor child would have to have a guardian appointed in order to manage the money. So to avoid that scenario, we put the inheritance in a contingent trust with maybe an uncle or aunt in charge of the trust until the minor turns 18 or 25 or whatever age parents feel like the kids are going to responsible adults.
If you have more questions about trust formations, more complex aspects of trusts, estate planning, or other legal concerns please do not hesitate to contact us or give the attorneys at Romano & Sumner a call. It’s our pleasure to make sure you feel taken care of and secure.
His last day as an only child by Travis Swan
Mula Noon by Ben Furiel
Romano & Sumner, PLLC