The Art Of Setting Up A Trust

Any adult can establish a trust as long as they are mentally competent and not acting under the influence of drugs, alcohol or duress. A trust is established by a written trust document that appoints a "trustee" and gives detailed instructions on the management of the property.

Basically, there are two types of trusts — a living trust and a testamentary trust. Living trusts are created during the lifetime of the trustor. It is not necessary to go through probate court to establish a living trust. The trust document is ordinarily not made public. For that reason, living trusts are often a good way to transfer property confidentially. In addition, because the trustor names a trustee in the trust documents, property which is subject to the trust can (when appropriate) be professionally managed.

A living trust can be established which allows income to be taxed to the beneficiary, not the trustor. If you have a high income and a lot of property, it may be possible for you to establish a trust for your children or other beneficiaries, and have their income taxed according to their income level, not yours. However, income earned by a trust for a beneficiary under the age of 14 may be taxed at the parents' tax rate.

The transfer of property to a living trust may very well be subject to a gift tax. The tax implications of a living trust should always be carefully analyzed by a competent tax specialist or CPA. A trust may be either irrevocable or revocable. An irrevocable living trust transfers property to a trustee for management. The trust may not be altered or terminated after the trust is established.

The revocable living trust also provides for a transfer of property. However, it is also "revocable". In other words, the trustor can modify or extinguish the trust during their lifetime. The revocable living trust is often a quicker and easier way to transfer assets than using a will and going through probate.

The pros and cons of whether or not to establish a revocable living trust, including tax advantages or disadvantages, should be thoroughly reviewed with a qualified consultant or CPA. Testamentary trusts are established by a provision in a will. A testamentary trust is established upon the death of the person who wrote the will (testator) and can be used to accomplish a number of goals. It might, for example, provide specifically for a child's education. If the child is a minor, a trust will establish a way to control and preserve assets until the child matures into a responsible adult. Some trust provisions may result in the avoidance or reduction of taxation upon the death of the trust beneficiary.

A life insurance trust can be established to receive proceeds which normally would be paid out under a life insurance policy. It can be used in certain situations to exclude insurance proceeds from taxation in the deceased person's probate estate.

A charitable trust is another type of trust, the purpose of which is to provide financial benefit to a charity or the general public. There are some tax advantages to establishing a charitable trust, but such a trust must be established with careful attention to complicated legal requirements.