B. PURPOSES AND USES OF TRUSTS
Trusts are one of the most powerful, useful, and advantageous tools available to the modern estate planner. This section discusses some of the reasons you may decide to recommend a trust to your clients.
1. Provides for and Protects Trust Beneficiaries
The settlor’s desire to provide for and protect someone is probably the most common reason for choosing to use a trust. Although a donor could make a quick, convenient, and uncomplicated outright gift, there are many situations in which such outright gifts would not effectuate the donor’s true intent.
Minors lack legal capacity to manage property and usually have insufficient maturity to do so as well. Thus, a trust allows a settlor to make a gift for the benefit of the minor without giving the minor control over the property. A trust is also more flexible and allows a settlor to have greater control over how the property is used when contrasted with other methods such as a transfer to a guardian or conservator of the minor’s estate or to a custodian under the Uniform Transfers to Minors Act.
b. Individuals Who Lack Management Skills
A person may lack the skills necessary to properly manage the trust property. This deficiency could be the result of mental or physical incompetence or a lack of experience in the rigors of making prudent investment decisions. For example, persons who suddenly obtain a large amount of money, such as actors, professional athletes, lottery winners, or personal injury plaintiffs, tend to deplete this “windfall” rapidly because they have never learned how to manage their money wisely. By putting the money under the control of a trustee with investment experience, the settlor increases the chances that the beneficiary’s interests are served for a longer period of time.
Some individuals may be competent to manage property but are prone to use it in an excessive or frivolous manner. By using a carefully drafted trust, a settlor can protect the trust property from the beneficiary and the beneficiary’s creditors.
d. Persons Susceptible to Influence
When a person suddenly acquires a significant amount of property, that person may be under pressure from family, friends, investment advisors, and many others to let them share the windfall. A trust can make it virtually impossible for the beneficiary to transfer trust property to these people.
2. Provides Flexibility of Asset Distribution
An outright gift, either inter vivos or testamentary, gives the donee total control over the way the property is used. With a trust, the settlor can restrict the beneficiary’s control over the property in any manner the settlor desires so long as the restrictions are not illegal or in violation of public policy. This flexibility allows the settlor to determine how the trustee distributes trust benefits, such as by spreading the benefits over time, giving the trustee discretion as to whom receives distributions and in what amount, requiring the beneficiary to meet certain criteria to receive or continue receiving benefits, or limiting the purposes for which trust property may be used, e.g., health care or education.
3. Protects Against Settlor’s Incompetence
Once a person is declared incompetent due to illness, injury, or other cause, the person cannot manage property. The court then needs to appoint a guardian of the estate or conservator to manage the property. This process may cause the person considerable embarrassment and there is no guarantee the incompetent person will be happy with the guardian’s decisions. Guardianships are also inconvenient and costly.
Trusts can be used to avoid the need for a guardian. The settlor may create a trust and maintain considerable control over the trust property by, for example, actually serving as trustee, retaining the power to revoke the trust, and even keeping a beneficial life interest. However, upon incompetency, the settlor’s designated successor trustee would take over the administration of the trust property in accordance with the directions expressed by the settlor in the trust instrument.
An alternative method to protect property and avoid the need for a guardian in the event of incompetency is to have the client execute a durable power of attorney for property management.
4. Allows Professional Management of Property
The settlor may create a trust to obtain the services of a professional asset manager. Trustees, such as banks and trust companies, may have more expertise and experience with various types of investments than most individuals. Professional trustees also have greater investment opportunities. For example, a bank may combine funds from several trusts into one common trust fund to take advantage of opportunities that require a large investment and to diversify, thus reducing the damage to the value of a particular trust when one investment turns sour.
However, you must consider the effect of trust fees when discussing the selection of a trustee with the client. The value of the trust property and its potential for income should be high enough to insure that the benefit from professional management outweighs the cost of that management.
5. Avoids Probate
Property in an inter vivos trust is not part of the probate estate upon the settlor’s death. The property remaining in the trust when the settlor dies is administered and distributed according to the terms of the trust instead of passing under a will or by intestate succession. Advantages to avoiding probate include providing for the property to reach the hands of the beneficiaries quickly, avoiding gaps in management, and evading probate publicity. These advantages, however, do not apply to testamentary trusts since they do not avoid probate.
6. Provides Tax Benefits
Another popular reason for utilizing trusts is tax avoidance. Income taxes can be saved by shifting income earning property to a person in a lower tax bracket.