Annuity Fact Book, National Association for Variable Annuities, 2002
Most people do not look forward to planning the distribution of assets upon their death. However, it is a task that all of us must face. And, that’s where trusts enter the estate-planning arena. A trust is simply an arrangement whereby one person holds legal title to an asset and manages it for the benefit of another. In one form or another, it may be used in personal financial planning.
One of the most remarkable characteristics of a trust is the ability of the trust to bridge the gap between life and death. Essentially, the person establishing the trust is able to rule from the grave, not forever, but to the extent the law allows. Usually, a trust can be designed to last for many generations.
Trusts can also be set up for an individual’s own benefit, not necessarily for tax purposes, but for many other reasons. He might want investment management, or a desire to invest in a new business venture with strong potential but with a high risk. He could then use the trust to ensure an income in the event of failure. He might elect to set up a family trust with the primary purpose of observing its operation and eliminating any deficiencies that might appear in actual operation. Though he might feel that presently he is able to manage his affairs, he is not certain about the future. In this instance, a “standby trust” could prove to be useful.
On the other hand, trusts can be established for the benefit of others, such as children, a spouse, grandchildren, or even parents. Additionally, an individual might want to provide for what might be regarded as missing elements in the abilities, experience, or training of beneficiaries.
This is especially a consideration when minors, or others deemed legally incompetent, are the intended recipients. But trusts may be set up for the benefit of competent, responsible adults too-for the same reasons the person establishing the trust might want to set up a trust for himself. These reasons include freedom from management burdens, expert administration, mobility, and other practical reasons, the most important being cash savings.
Although avoiding probate might be a consideration, the estate and gift tax savings made possible by the use of trusts might be even more important in many cases. Use of the trust device can often permit a donor to transfer assets for the benefit of a beneficiary, while shielding such assets from the reach of creditors. The laws of most states permit the creation of so-called “spendthrift trusts.” Use of such trusts might allow the individual establishing the trust to place both trust principal and income out of the reach of the beneficiary’s creditors. Usually these laws prevent the beneficiary from assigning any part of the interest in the income or principal of the trust since most creditors look to property that could be assigned by the beneficiary. Their attempts to reach assets can be thwarted or at least made more difficult. The person establishing the trust is generally permitted to make free use of his own assets, even if the result is to prevent a beneficiary from dealing with the trust’s assets at will.
Careful consideration should be taken before trusts are established. In addition, be certain to seek the advice of a qualified legal professional before establishing trusts.