Non-Tax Uses Of Trusts

Non-Tax Uses Of Trusts

By: David H. Dickey, partner at Oliver Maner LLP

Special to Business in Savannah

What is a trust? Often, when speaking to my clients about trusts, their eyes glaze over and one would think I was trying to explain the intricacies of nuclear fusion. However, without an understanding of trusts, people who hold property are missing out on opportunities to plan their estates in ways that will protect the property for their spouses and their future generations of descendants.

Black's Law Dictionary defines a trust as "a right of property, real or personal, held by one party for the benefit of another." A trust is composed of three parties who respectively: transfer property; hold and control the property; and receive benefits from that property (real and/or personal). These parties are: the "Grantor" (or "Settlor" who settles or forms the trust by transferring the property to it); the Trustee who is the person or entity who or which owns the legal title to the property and controls the property to be held for the benefit of one or more persons; and the Beneficiary who is the person for whose benefit the property is held by the Trustee. These positions may all be held by the same person or entity or by different persons or entities. For example, the Grantor may name himself as Trustee and as Beneficiary. Alternatively, a Grantor may transfer property to a spouse who may hold it for the benefit of a child. One might think of a trust in the same way that he or she thinks of a separate entity such as a corporation, an LLC, or a partnership, although in many cases no separate tax return needs to be filed for the trust.

A trust may be formed during life by a Settlor, in which case it is often referred to as a "Living Trust" or an "Inter Vivos" (during life) Trust. Trusts may also be created under a decedent's Last Will and Testament, and these are often referred to as "Testamentary Trusts." A trust may be "Revocable" in which case the Grantor may reacquire all of the trust assets in his or her personal name, or it may be "Irrevocable" in which case the underlying trust property cannot be reacquired by the Grantor (although the Grantor may be able to continue to receive income and/or distributions of trust corpus for his or her support).

The property placed into a trust is referred to as the trust "res," the "trust principal" or the "trust corpus." The income from the trust may be payable to one or more beneficiaries including the Grantor, and the trust corpus may likewise be distributed to or among one or more beneficiaries, including the Grantor, subject to whatever standards the Grantor imposes at the time of establishment of the trust (or by later amendment of a revocable trust).

Traditionally, trusts have been used primarily as vehicles to save payment of otherwise applicable Federal Estate Taxes and State Inheritance Taxes. There are, however, many other uses of trusts which prudent persons should consider in deciding how to transfer their property to or for the benefit of their loved ones (at death or during life).

Two other major reasons for the use of trusts include:

  1. Keeping property in the family. There are many ways that families who transfer property outright and free of trust to their loved ones can lose that property over time. A few examples will illustrate:

Example One. Mary and Jim have been married for 40 years (in a first marriage) and Mary dies. They have three children and six grandchildren. Mary's Will leaves everything to Jim. Six months later, Jim meets a lovely 32-year old named Salacia with three children and decides to marry her. After living together for several years, Jim is persuaded by Salacia to change his Will and leave everything to her. Jim does so. Jim then dies and the new spouse inherits all of Jim's (and Mary's) property. The new spouse, Salacia, then prepares a Will and names her three children as beneficiaries excluding Jim and Mary's children altogether.

Example Two. Same facts as in Example One except that Jim does not remarry and, upon his death, leaves his assets free of trust to his children. Bill, the eldest child, blows through his inheritance within a year, traveling and partying. Fred, the middle child, co-mingles all of the inherited assets with assets belonging jointly to him and his wife, Susan, and is subsequently divorced from her. They have no children. Fred loses half of his assets to Susan in the divorce. Of course, when she dies, Susan leaves those assets to her family members and not to Fred or any of his relatives. Karen, the youngest child, manages her share of the inherited assets well and ends up with a great deal of accumulated wealth at the time of her death. However, before she dies, Karen goes into a nursing home where she is visited every day by one of her children (her daughter) who brings cookies, candies and cake. Karen's other child lives in Hawaii and is not able to come see his mother often due to his demanding job. Not surprisingly, when Karen dies, her daughter is left all of the assets and Jim and Mary's grandchild in Hawaii is left out of the picture altogether. So are his children.

These are just a few examples of the various ways in which assets can fall outside of the family. Had Jim and Mary decided to use a trust and place the trust property under the control of the most competent family member(s) (who would owe a fiduciary duty to the beneficiaries), these family misfortunes might well have been avoided.

  1. A trust can provide for long-term control over family assets. When the assets pass outright and free of trust directly into the hands of individuals, there are many ways the assets can be lost. The individuals may be spendthrifts and waste the assets; they may be poor investors who are not capable of handling money; they may be "talked out of the assets" by smooth-talking sales people, etc. By placing the property in a trust and naming a capable Trustee (and building in certain protections to make sure the beneficiaries are all fairly treated), the principal (or corpus) of the trust can be retained for many generations. For example, the trust may be divided into separate shares for each child (and upon the death of a child, such child's descendants), with each generation of beneficiaries to receive the income and such amounts of the principal as they need for their reasonable support, maintenance, education and health care needs. If there is a family business involved (or family rental real estate), the most capable person can be placed in charge of the entity so that the assets will not "evaporate" in the hands of members of the subsequent generations. Also, if a business is involved, the control of that business can be placed in the trust, so that the Trustee (or Trustees) will be able to control the company and avoid family disputes which might otherwise arise if the voting interests in that entity were instead held by numerous individuals (including, possibly, the most immature descendants of a deceased child).

Throughout my career, I have tried to help clients understand just how important it is for pro-action, not reaction. Even the most perfect plan should be re-evaluated periodically as laws change. Keeping in touch with your advisors on a regular basis is the best means of staying ahead of any potentially damaging or asset-threatening situation.

David H. Dickey is a partner in Oliver Maner LLP and concentrates his practice in the areas of Estate Planning, Business Law, Business Entities, Probate & Estate Administration and Taxation. He can be reached by email at [email protected] and by phone at 912.236.3311.