Trust

A trust is an entity created by a person (often called the settlor or grantor) which results from the transfer of property to another person or institution (called the trustee) with instructions regarding the management and distribution of the property. The trustee is conveyed legal title to the property placed in trust and has power to deal with the property as though the trustee were the owner.

A trust can be created either by an individual’s will (known as a testamentary trust) or through a form of contract entered into during the lifetime of the grantor (known as an inter vivos trust). A trust can be revocable (subject to termination) or irrevocable (the settlor gives up future control over the property transferred into the trust). Furthermore, an inter vivos trust may be funded or unfunded, meaning that assets may (funded) or may not (unfunded) have been transferred to the trustee in trust.

Revocable trusts have no tax advantages in that the income of the trust is taxed to the grantor during his life and the principal of the trust is taxed as part of the grantor’s estate upon his death. A revocable trust is useful to provide for organization and management of property during the life of the settlor. In addition, a revocable trust may be used to avoid the necessity of commencing a probate proceeding in all states in which real property is located (known as ancillary probate). A revocable trust may also be utilized to provide management of assets in the event of incompetency. In order to avoid probate, it is generally necessary that all assets owned by the grantor be placed in the trust. A revocable trust is not always the best estate planning option. The appropriateness of a trust is determined by the particular circumstances.

A "bypass trust" is commonly used and is identified by many terms, which include the "bypass trust," the "credit shelter trust," the "exemption equivalent trust," or the "A-B trusts." The purpose of this trust is to segregate, upon death of a married person, the maximum amount of assets that can be passed free of federal estate taxes. This trust is not actually funded during lifetime, but is created through a will, revocable trust or other testamentary planning instrument. In 2008, the maximum amount that can be passed by any person free of estate taxes is $2,000,000. For a married couple, each person can take advantage of the credit amount with proper planning. For a married couple, it is particularly important to review the planning options available so that the maximum amount can be passed free of estate tax.