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What is a trust?

An arrangement which transfers legal title of property to the trustee for the benefit of one or more beneficiaries.


Why would I want one?

·      Financial oversight:  A trust can provide financial oversight for someone who is not suited, due to age, illness, or other factors, to manage the assets themselves.  For instance, grandparents may want to make annual gifts to their young grandchild.  By making the gifts to a trust for the child, the trustee can oversee management of the funds until the child is mature enough to manage the funds themselves.

·      Asset protection:  A properly structured trust can assure that assets go to who you want to receive them and are not diverted outside your family through actions such as  divorce or bankruptcy.

·      Estate tax savings:  A married couple can shelter twice as much from estate taxes by using trusts as they could shelter without trusts.  In 2002 an individual can transfer $1,000,000 (changing in future years) without federal estate taxes; thus, a married couple could shelter $2,000,000 through use of trusts.

·      Charitable giving:  Contributing to charity through a trust can provide greater flexibility to the donor than giving the assets outright.  For instance, a donor could place $1,000,000 into trust and receive 6% of the trust's value annually as long as the donor lives.  Upon donor's death, the designated charity receives the balance of the trust.


How is a trust created?

A document should be written by an attorney, properly signed, and the trust must be funded. In other words a trust must hold assets in order to exist.


Who can serve as trustee?

An individual or a corporation which holds trust powers.  The benefits of an individual trustee are that often they know the family and their wishes and they may be willing to serve without compensation.  A corporate trustee has the benefits of independence from the family and its emotional ties, familiarity with handling trusts and the attendant details, and an existence which extends beyond the life of any given individual. Often an individual and a corporation are named as co-trustees to gain the benefits each has to offer.


Can the trustee of a trust be changed, and if so, how?

Often the document creating the trust will define how the trustee can be changed.  For instance, many give that power to a majority of the adults receiving income from the trust.  A request can also be made to an appropriate court if the beneficiaries want to make a change of trustee which is not addressed by the document. 

What are some common types of trusts?

·      Testamentary:  A trust set up in someone's will.

·      Living:  A trust set up while the grantor (the person setting it up) is alive.

·      Revocable:  A trust which can be terminated by the grantor.

·      Irrevocable:  A trust which, once set up, cannot be terminated other than by the provisions written into the trust document.

·      Family trust:  Also called credit shelter trust or by-pass trust.  A trust generally created in a will and usually funded with the amount which can be left to a non-spouse with no federal estate taxes (in 2002 this amount is $1,000,000; it changes in the coming years).  Usually income is paid to the surviving spouse and assets go to the children at the death of that spouse.  This type of trust is designed to be excluded from the estate of the surviving spouse.

·      Marital trust:  A trust generally created in a will and usually funded with all that is not given outright or used to fund the family trust.  Typically, income is paid to the surviving spouse, but the value of this trust is included in the estate of the surviving spouse.

·      Q-Tip:  A special form of marital trust.  This qualifies for the marital deduction (you may leave an unlimited amount of assets to your spouse--if he/she is a U.S. citizen--without estate taxes), provides income to the surviving spouse, but controls who ultimately receives the assets.  For instance, a husband who has been married twice may set up a Q-tip trust in his will which provides income to his second wife so long as she lives, but then leaves assets to his children from his first marriage at the death of his second wife.

·      Life insurance:  A trust which holds a life insurance policy as all or part of its assets.  A life insurance trust can be used to remove the proceeds of the policy from the estate of the insured.

·      Charitable remainder trust:  A trust created either while the grantor is alive or in his/her will which annually pays a percentage of its value to designated individuals (the grantor, his spouse, etc.) and at termination of the trust (at the death of the grantor or at the later of the death of the grantor and his/her spouse, etc.), pays the balance of the assets to a designated charity.

·      Charitable lead trust:  A trust created either while the grantor is alive or in his/her will which annually pays a percentage of its value to a designated charity and at termination of the trust, pays the balance of the assets to designated individuals (such as the grantor's children).


This information has been prepared by Independence Trust Company to highlight issues which may be of interest to the recipient and is not intended as legal or tax advice. You are urged to seek tax and accounting counsel for your particular situation before acting on topics discussed here. At Independence Trust Company, we assist our clients in managing and enhancing their wealth.  Please call us at 615.591.0044 with questions or to schedule a meeting.  © 2000 - 2002 Independence Trust Company


Independence Trust Company

P.O. Box 682188

Franklin, TN   37068-2188


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