2022 AFBA Financial Planning Guide

Irrevocable Living Trusts. When establishing this type of trust, you make an irrevocable transfer of money or other assets to the trust — consequently, you may also give up your rights over the trust income and benefits. Two of the most common reasons for establishing an irrevocable living trust are: a. To set aside a sum of money or income producing property so that income from that money can subsequently be distributed to a family member. In this type of trust, the income may be taxed to the family member at a substantially lower rate, while the principal used to create this income may be returned to the trust grantor when the trust period terminates. b. To set aside a specific sum of money where both the money as well as the income it earns are used to provide for a family member’s education or well being. Testamentary Trusts. A testamentary trust is similar to a living trust except that it is created by a person’s will (his or her testament). The primary reason for setting up a testamentary trust is that, while the trust grantor might feel competent to handle his or her affairs while still alive, he or she wants to ensure that they are professionally managed (by a trust) after their death. Another important factor in creating a testamentary trust is possible income and estate tax savings. Selecting a Trustee. Without a doubt, one of the most important aspects of establishing any form of trust is the selection of the trustee. Aside from any legal qualifications the trustee might have to satisfy, you should personally assure yourself of the trustee’s honesty, experience, good judgement, and ability to manage the trust’s assets. Another important consideration should be the trustee’s fees for managing and administering the trust. If the trust is of substantial dollar value, the fees might not be a major concern, but a trust having a relatively small dollar value could be dissipated by the fees. Although state and local laws usually provide detailed guidance regarding the powers a trustee has in administering a trust, you should ensure that your trust agreement includes specific instructions and authority to enable the trustee to carry out your wishes. Always be sure to include a “trustee removal clause.” This enables the grantor to replace a trustee whose performance is unsatisfactory. Also, to ensure that any assets that are not included in the trust at the time of death are transferred to the trust, the will should contain a “pour over” clause.

else to manage and administer for the benefit of a third party — usually an individual. Trusts may be established for many reasons including the desire to avoid probate (thereby allowing the immediate transfer of assets at time of death) and to provide for the management of assets if one becomes unable to handle them. When discussing a trust it is important to understand the following terminology: Trustee. This is the party responsible for managing and administering the trust. A trustee can be an individual, a bank, or a trust company. Beneficiary. This is the person or entity (such as an estate) designated to receive the benefits of the property being managed and administered by the trustee. Grantor. This is the person who establishes the trust. If you establish a trust while you are still living, it is referred to as a living trust . On the other hand, a trust which is created by your will (after your death) is referred to as a testamentary trust . When a living trust is created, you have the option of making it revocable or irrevocable. If it is revocable, you can change or cancel the trust as you desire. On the other hand, once an irrevocable trust is established, it can not be changed. Revocable Living Trusts. A revocable living trust can be used to accomplish a variety of objectives both for yourself or for other persons. A few of the more popular reasons for setting up a revocable living trust are: a. To obtain the investment and management expertise of a trustee whom you believe to be knowledgeable and capable of handling financial affairs or the affairs of the trust’s beneficiaries. b. To free you from the efforts required to manage property which might be located in a variety of areas. c. To set aside real property or a specific sum of money (or other liquid assets) for retirement or other purposes. While all trusts have certain advantages and disadvantages, one of the best features of a living revocable trust is that the trustee’s performance and skills in handling the trust’s assets can be evaluated. If you are not satisfied with his or her results, the trust can be revoked or another trustee can be appointed. A word of caution, trusts are complicated, be sure to get competent legal advice when you are setting up any trust.

CHAPTER 9: IMPORTANT PAPERS, WILLS & TRUSTS

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