Attorney F.W. O'Connor of CT

The Law Office of F. William O'Connor, LLC

P.O. Box 1224
20 East Main Street
Avon, CT 06001-1224

Telephone: 860.677.2254
Fax: 860.676.8912
Email: info@attorneyoconnor.com
-

 

-

The document offered below is for informational purposes only and not for the purpose of providing legal advice. With respect to any specific issue or problem, you should contact an attorney for advice. Thank you.

-- F.William O'Connor, Attorney at Law


BASIC INFORMATION ABOUT TRUSTS

What Is a Trust?

A trust is a separate legal entity that involves three parties who are normally referred to as the Donor, the Beneficiary and the Trustee. The Donor is the person who creates the trust agreement and then transfers property to the trust for the purpose of benefiting the Beneficiaries which can also include the Donor. The Trustee’s job is to manage the trust.

What does it mean if a trust is Funded or Unfunded?

Trusts can either be funded or unfunded. A funded trust simply means that the Donor has transferred something into the trust, e.g. a bank account opened in the name of the trust. In order to avoid probate, your trust must be fully funded meaning you have transferred all your potential probate assets into the trust. An unfunded trust is a trust which has not yet been funded with any significant assets. Typically an unfunded trust is normally funded under the terms of your Will.

What is the difference between revocable and irrevocable trusts?

Trusts may be revocable or irrevocable. A revocable trust means that it can be changed or even terminated during your lifetime. An irrevocable trust means that it cannot be changed or revoked once it is established.

Because revocable trusts can be changed or revoked at any time during the Donor’s lifetime, they remain the most often used form of trust agreement. Because the Donor retains complete control of this trust during his or her lifetime, the IRS considers any property in the trust at the Donor’s death will be included in the Donor’s taxable estate for federal estate tax purposes. During the Donor’s lifetime the IRS ignores a revocable trust as a separate legal entity and requires the Donor report all the trust’s annual income in his or her individual tax return as if the trust did not exist. Most revocable trusts contain provisions which make transform them into irrevocable trust upon the death or disability of the grantor.

Since Irrevocable Trusts cannot be changed once they are executed, they are less appealing but can be very useful in certain circumstance. The assets placed into an irrevocable trust are permanently transferred from the Donor to the trust. Because the assets are permanently transferred, the IRS normally respects the separate nature of the irrevocable trust and therefore the income from the trust is taxed to the trust. Upon the Donor’s death, the assets in the trust are normally not considered part of the Donor’s estate and therefore are not subject to estate taxes.

What is the Role of the Trustee?

The Trustee is responsible for managing and investing the trust’s assets. In many revocable trusts the Donor is also the Trustee during the Donor’s lifetime. Most Donors appoint themselves as the initial Trustee during their lifetimes and appoint a family member or advisor as the Trustee after their death or disability. By law, the Trustee has the legal responsibility known as a “fiduciary duty” to act in the Donor’s and Beneficiaries best interest.

What are the Benefits of a Trust?

Trusts can be structured to provide for lifetime management of any assets transferred into the trust. A trust can also act as a Will substitute assuming it is fully funded thereby avoiding the necessity of having to probate the assets in the trust. It should be noted that in Connecticut, revocable trusts do not save probate court fees. These fees are the same whether or not a revocable trust is used. A trust can also provide confidentiality and privacy since the trust does not normally become a public record. Finally, a trust may help in reducing or eliminating estate taxes.

In summary, trusts are very flexible and can be designed to accomplish a number of beneficial objectives including:

  1. If properly structured and funded it can avoid probate
  2. It can help minimize or eliminate estate taxes
  3. It can provide for the professional management of property
  4. It can provide for children into their adulthood
  5. It can be used the help keep your affairs private
  6. It can be provide continuing care for special needs individuals without jeopardizing their eligibility for public assistance benefits

What Are The Various Types of Trusts?

A Revocable Trust, often referred to as a “Living Trust” tends to be the most common type of trust because of its flexibility. A living trust typically provides that the Donor is both the Trustee and the Beneficiary of the trust during the Donor’s lifetime. The Donor maintains control of the assets and receives all income and benefits from the trust during the Donor’s lifetime. Upon the death of the Donor, the person or institution designated becomes the successor trustee who then manages or distributes the remaining assets according to the terms of the trust agreement.

In addition, a fully funded living trust, can also avoids the probate process (though not the probate fee as noted above) while helping to protect confidentiality and privacy since the trust is not part of the public probate process. Most living trusts also contain provisions providing that if the Donor should become incapacitated during the term of the trust, the successor or co-trustee would take over its management thus assuring your financial goals and objectives would continue even if you become incapacitated.

A Children’s Trust is often used by parents of minor children and young adults to avoid the potential situation of children receiving large sums of money before they are mature enough to handle it. In Connecticut, An Irrevocable Life Insurance Trust is often used as an estate tax funding mechanism. Under this trust, the Donor typically either transfers an existing life insurance policy or transfers cash to an irrevocable trust, which in turn uses this cash to purchase a life insurance policy on the Donor. Upon the Donor’s death, the policy’s death benefit proceeds are payable to the trust, which in turn provides tax-free cash to help beneficiaries meet any estate tax or other obligations.

A Qualified Personal Residence Trust is used to transfer a home or other residence to a trust at a substantial discount in the market value thereby reducing the gift tax on the transfer and removing the residence from the estate at a discount. This trust allows you to continue to use the home for a predetermined number of years, after which time ownership is transferred to the trust or beneficiaries. Any gift tax you might pay from giving away the property will be discounted because you still have the right to use the house during the term of years spelled out in the trust. The principal drawback to this trust is that if you die before the term of the trust ends, the home will be considered part of your estate.

A Charitable Lead Trust is designed to benefit your favorite charity while serving your own trust purposes. The Charitable Lead Trust donates the income from the trust to the charity for a designated amount of time, after which the principal goes to the beneficiaries, who receive the property free of estate taxes. A portion of the value of the assets originally transferred to the trust will be subject to gift taxes.

A Charitable Remainder Trust (CRT) operates just the opposite way. The Donor receives an immediate tax donation for the fair market value of the property transferred to the trust while receiving income from the trust during the Donor’s lifetime, while ultimately leaving the assets to the charity. Through this trust, the Trustee will sell the donated property or assets, tax-free, and establish an annuity payable to you, your spouse, or your heirs for a designated period of time. Upon completion of that time period, the remaining assets go directly to the charity. Highly appreciated assets are typically the funding vehicles of choice for a CRT.

 

[ Return to Document Table of Contents ]

Serving the communities of Avon, Simsbury, Canton, West Hartford, Farmington, Burlington, Harwinton, Hartford, and the State of Connecticut

Privacy Protection Policy

Copyright 1999- by The Law Office of F. William O'Connor, LLC. All rights reserved.
Website Designed by Blarneystone Internet Services