A trust is an arrangement under which a person or institution, called the trustee, holds the title to property for the benefit of another person called the beneficiary. The person who establishes the trust is called the "settlor" or "trustor" or "settlor". Often the settlor, the trustee and the beneficiary will, at least initially, be the same person. There are "living" trusts, which are set up while a person is alive, and "testamentary" trusts, which are set up in a will to become effective after a person's death.

A trust is an effective method for providing for asset management and protection of resources in the event of illness or incapacity. It is a particularly useful tool for larger estates with multiple or complex assets or where there is no close family member available to act as agent. A trust also can be used to avoid probate. If all the assets owned by the decedent are in the trust, or pass by beneficiary designation, there will be no need for probate. This tool is especially useful when the decedent owns real property in a state other than his or her state of residence. A trust also can be used for estate tax avoidance or minimization and as a means of providing support for minor, disabled or immature children or grandchildren.

A trust created for the lifetime management of property is known as an intervivos or "living" trust. The trust can be revocable, that is, it can be amended or terminated at anytime or under certain conditions described in the document; or irrevocable, that is, it cannot be amended or terminated before the terms of the trust have been fulfilled. The trust can be funded by titling accounts and assets to the trust, or left unfunded, depending upon state law. In Virginia, an unfunded trust is a valid trust.

There are both advantages and disadvantages to the use of a trust. It offers the creator of the trust, the "settlor" (sometimes called "trustor" or "settlor"), a great deal of control. The settlor may serve as the initial trustee and may name the successor to take over in specified circumstances. In managing assets, a trust allows for continuity of management and centralization of record keeping. A living trust is not subject to court supervision. It can be used to avoid probate. Through use of "spendthrift" provisions, when the beneficiary is not the settlor, it potentially can protect assets from the claims of creditors of the beneficiary. It is usually quicker, easier, and less expensive to distribute an estate held in trust.

Use of the living trust tool also has its disadvantages. A trust is more expensive than a POA to set up than a power of attorney and may be more expensive to manage. An irrevocable trust will require a tax identification number and have to file an annual federal income tax return. A trust may adversely affect eligibility for public benefits such as Medicaid, if not properly written.

As mentioned above, living trusts are a means of avoiding probate and its associated costs. However, in Virginia, where the cost of probate is relatively reasonable, such a savings may not warrant the costs associated with establishing a trust and transferring assets to it. Moreover, in Virginia, if an estate is probated, creditors can be barred after one year from making future claims against the executor of the estate if the executor follows certain legal procedures. This can avoid unpleasant surprises to the executor in the future if an unknown creditor should make a claim against the estate assets. The creditor would have to try to collect directly from the beneficiaries of the estate. This protection is not available to the trustee when assets are distributed through a trust.

Where the goal is to establish a trust that will continue on after the death of the settlor, a living trust, as opposed to a testamentary trust, has certain economic and practical advantages. A testamentary trust, that is a trust established in a will, remains under the jurisdiction of the court. Unless waived in the will, in Virginia, each year an annual accounting must be submitted to the Commissioner of Accounts and fees based on the value of the trust assets must be paid. A living trust is not subject to the jurisdiction of the courts unless someone files an action against it.

A common use of trusts is as a means of tax minimization or avoidance. Such trusts come in a multitude of forms including life insurance trust, charitable remainder trust, charitable lead trust, personal residence trust, settlor retained income trust, and qualified terminable interest property trust (QTIP). Where a spouse is not a U.S. citizen, establishment of a qualified domestic trust (QDT) is a useful, indeed necessary, tax planning strategy.

In addition, where the goal is to insulate assets from beneficiaries' possible creditors, a properly designed trust may be the appropriate device.

In the right circumstances a trust can be a useful tool in long-term care and decision-making planning. However, it must be specifically tailored to the needs and desires of the particular individuals creating and benefiting from it. Our experienced attorneys can evaluate whether a trust is right for you.

Congress substantially overhauled the estate tax scheme a few years ago. Below is a chart which shows the estate tax thresholds through 2011. As you can see, the exemption amount rises to $3.5 million in 2009, with the estate tax being repealed entirely in 2010. However, in 2011, the estate tax is back and the exemption amount drops to $1 million. Though it should be anticipated that Congress will tinker with this scheme between now and 2011, absent a crystal ball it is difficult to know exactly what will happen.

Estate Tax Rates

Year

Estate Tax Credit

Highest Estate Tax Rates

2004

$1.5 Million

48%

2005

$1.5 Million

47%

2006

$2 Million

46%

2007

$2 Million

45%

2008

$2 Million

45%

2009

$3.5 Million

45%

2010

Tax Repealed

0%

2011

$1 Million

55%

If you have a potentially taxable estate under the current scheme, you should consider doing some estate tax minimization planning. The basic plan for husband and wife is called a "bypass trust" (also termed a "family trust" and "credit shelter trust"). Under this plan, at the death of the first spouse assets equal to up to the credit shelter amount are placed in the "bypass trust" for the benefit of the surviving spouse. All the income from the trust usually is available to the surviving spouse. Principal also can be distributed for the health, support, maintenance and education of the surviving spouse. The trustee of this trust can be the surviving spouse. Though the survivor has full benefit of the bypass trust assets, she or he is not deemed the owner of the assets for tax purposes. So at the death of the survivor the assets remaining in the bypass trust pass to the next generation, or whomever you designate, free of estate tax, while the survivor's credit shelter exemption amount is available to protect assets passing outside the trust from estate taxes. In this way a husband and wife can pass twice the exemption amount free of estate tax. For example, a husband and wife who die in 2008 can pass up to $4 million free of estate tax.