Trusts involve a grantor, a trustee, and one or more beneficiaries; a grantor transfers the ownership of his or her property to a trustee, who holds it for the benefit of the beneficiary(ies).Contrary to some popular misconceptions, trusts do not have to be expensive to maintain, nor do they have to be inflexible. Moreover, trusts need not alienate beneficiaries from the decision-making process. Trusts can provide significant advantages to all individuals regardless of their levels of wealth.

This chapter explains how trusts can be used in estate planning, how (or if) you can set up a trust, what living trusts are, and how to select a trustee.

Using Trusts in Estate Planning

Trusts are used for a variety of purposes; indeed, the flexibility of trusts is perhaps the major reason they are so widely used in estate planning. Trusts can be created and funded during lifetime (inter vivos trusts), or they can be created by the terms of a will (testamentary trusts). The terms of a trust may allow it to be changed or even revoked by the grantor, or the trust terms may be fixed or irrevocable at the date of creation. This flexibility allows the grantor to use a trust to meet his or her specific personal objectives.

Several of the primary purposes for using trusts in estate and financial planning include:

· Managing Assets. The responsibility of making investment decisions and maintaining adequate records can be transferred to either a corporate or an individual trustee.· Protecting Assets. In certain situations, a properly drafted trust can protect the assets in a trust from the creditors of a beneficiary. In addition, the assets may be protected from a spouse or former spouse in the event of the divorce of the beneficiary.

· Providing Privacy. The assets, terms, and conditions of a trust are generally not subject to public inspection.

· Avoiding Probate. The assets that are held in a trust created and funded during the grantor’s lifetime are controlled by the terms of the trust and not by the terms of probate. In some states, avoiding probate can save time and reduce estate administration expenses.

· Providing for Multiple Beneficiaries. A trust can be created for the benefit of multiple beneficiaries and can allow the trustee to use discretion in making distributions.

· Providing for Special Needs. A beneficiary may have a special need related to education, health, and so forth. A trust can be drafted to address special requirements.

· Tax Planning. A trust can be used to help take full advantage of the combined benefits of all deductions and the unified credit while assuring that all necessary assets can be available to meet needs.

For example, your will could leave all your assets to your spouse except the amount equal to the $1 million exemption amount. This $1 million would go into trust for the benefit of your spouse and family. Although your spouse would be able to benefit from your entire estate, the trust assets would not be included in the estate of the surviving spouse on his or her subsequent death. Table 4-1 illustrates the tax savings from using a trust as compared to making an outright bequest of the entire estate to the surviving spouse.

Tax Savings from the Use of a Trust

Outright Bequest of All Property to Spouse

Total Assets               $2,000,000

Marital Deduction       (2,000,000)

Amount to Trust           -0-

Tax on First Spouse’s Death -0-

Taxable Estate of Surviving Spouse 2,000,000



Tax at Death of Surviving Spouse (after credit) $435,000


Trust Funded with   Exemption Equivalent Estate Tax Savings

Total Assets               $2,000,000

Marital Deduction      (1,000,000)

Amount to Trust          1,000,000

Tax on First Spouse’s Death -0-

Taxable Estate of Surviving Spouse 1,000,000


Tax at Death of Surviving Spouse (after credit) -0-