What is a Trust?

What is a trust? Black’s Law Dictionary defines a trust as “An equitable or beneficial right or title to land or other property, held for the beneficiary by another person, in whom resides legal title or ownership, recognized and enforced by courts of chancery.” While that definition is rather legalese, it does boil it down to the basics. A trust is a relationship between the grantor and the trustee in which the trustee agrees to hold the property for the benefit of the beneficiaries who were chosen by the grantor. The trustee is agreeing to manage the assets as set forth in the trust’s terms and distribute them when and how specified in the trust.

The grantor (also known as the “trustor” or “settlor”) is the person who establishes the trust and the trustee is the person who manages the assets. The beneficiaries are those people for whom the grantor set up the trust and wishes to benefit, either currently or in the future.

The trust terms dictate how the trustee should manage the assets and what powers the trustee has in managing the assets. Depending upon the state, state law may supplement or supplant some of the terms of the trust. For example, the trust may direct the trustee to hold the assets for the beneficiary’s benefit forever. However, in many states, the Rule Against Perpetuities would require the trust to terminate within a life in being plus 21 years, or some other period. The terms of the trust may be oral or written. However, it is most common and most advisable that the terms be in writing. Today’s trusts are often quite lengthy and the terms can be quite detailed. It is these detailed terms that allow the trust to achieve the grantor’s goals for the trust.

There are many different reasons for which a grantor would set up a trust and those reasons would influence the drafting of the trust. Depending upon the reasons for the trust, the grantor might choose different trustees. I’ll discuss the considerations for the selection of trustees in a future blog. And depending upon the purposes of the trust, the terms for distributions to the beneficiaries might vary. Possible purposes of the trust include probate avoidance, tax minimization, management for minors, creditor protection, etc.

For example, Mary sets up a trust for her son, Danny, for his future needs. Mary is concerned that Johnny does not have good judgment. So, Mary asks her brother, Mike, to be the trustee to manage the assets for Danny’s future needs. She gives Mike $100,000 to Mike to hold as trustee.

Implicit in the trust is that the grantor trusts the trustee to carry out the terms of the trust and do what has been asked of them. In the above example, Mary is trusting that Mike will hold the $100,000 and use the money for Danny’s future needs. She is trusting that Mike will not spend the money on that European vacation he’s been wanting to take. She’s also trusting that Mike will use his discretion to decide when Danny needs the money. In a future blog, I’ll discuss different discretionary standards which might be used and what they mean for the trustee and beneficiaries.

529 Plans for Tax Savings and Asset Protection

Qualified State Tuition programs, more commonly known as “529” plans are a great way to save for the education of loved ones. Contributions to the plans enjoy deferral of income taxation. When distributions are taken for qualified education expenses, like tuition, the distributions are income tax-free—even better!

Normally, when you have control over an asset, that asset is included in their taxable estate for estate tax purposes. For example, if you put money in a trust and I retain the power to change who gets those assets, the trust would be in my estate under Section 2038 of the Code. However, a 529 plan is unique among estate planning strategies. It allows you to remove assets from their taxable estate and yet retain complete control. In fact, the client could even pull the money out for themselves (though they may pay a penalty on the earnings if the funds are not used for qualified education expenses).

In addition to Estate protection, there is not Bankruptcy protection as well. What does bankruptcy have to do with 529 plans? Now, 529 plans can be protected in bankruptcy under some circumstances. As long as the contribution is within the plan limits and is made at least two years before the filing in bankruptcy, the 529 plan is protected in bankruptcy.

So, a 529 plan can provide:

• Income that is tax-free if used for education

• Control for the client

• Ability to take the funds back

• Protection in bankruptcy

What other strategy can provide all this? If 529 plans were Estate Planning’s Holy Grail, maybe now they are Asset Protection’s Holy Grail, too.

Donald Trump's Tax Plan

Last week, we looked at Hillary Clinton’s tax plan. This week, we look at Donald Trump’s tax plan.

First, estate taxes. Donald Trump would completely up-end the current transfer tax system:
•    He would eliminate the estate tax entirely.
•    He would eliminate the gift tax entirely.
•    Presumably, he would eliminate the GST tax entirely.
•    He would disallow a step-up in basis for the assets of decedents with estates over $10 million.

Next, income taxes. Donald Trump’s tax proposals are not entirely clear and change. However, he has proposed the following:

•    Cap deductions at $100,000 for individuals and $200,000 for a married couple filing jointly.
•    Increase the standard deduction to $15,000 for individuals and $30,000 for married filing jointly.
•    Reduce the federal tax brackets from 7 to 3, with rates of 12%, 25%, and 33%.

Current estimates are that Trump’s tax plan would:

•    Reduce taxes for low income earners by an average of 1.2%.
•    Reduce taxes for highest income earners by 10.2%.

Hillary Clinton’s Tax Plan

The candidates’ standings in the polls go up and down. But how would each of them affect you and your estate planning? This week we look at Hillary Clinton’s tax plan and next week we will examine Donald Trump’s tax plan.

First, estate taxes. Hillary Clinton would keep the estate tax. In fact, she would enhance it by returning it to the 2009 law:

• Reduce the applicable exclusion to $3.5 million

• Increase the rate of taxation from 40% to 45%

• Reinstate the $1 million lifetime gift exclusion

Next, income taxes. Hillary Clinton has detailed income tax proposals, including the following:

• Small business can deduct up to $1 million in capital investment

• Institute the Buffett rule, i.e. taxpayers with income above $1 million would pay a minimum 30% effective tax rate

• Impose a 4% surcharge for taxpayers earning above $5 million

• Eliminate the “carried interest” loophole

• Graduated rates for capital gains based on holding period (Holding up to 2 years, ordinary income rates apply; 2-3 years, 36%; 4 years, 32%; 5 years, 28%; 6 years, 24%; 7 or more years, 20%)

The Tax Policy Center estimates that the top 1% of taxpayers with incomes above $750,000 would face average tax increases of $78,000 under the proposed Clinton plan. Those earning less than $300,000 would face no increase.

According to a piece in the New York Times, Clinton’s plan would add complexity to tax laws.

Next week, I’ll look at how Donald Trump’s plan would affect estate planning.