Trusts - Not Only for the Rich and Famous

Providing for the distribution of assets after death is not a task eagerly approached by anyone. It is, however, a task we must all face. And, that's where trusts enter the estate planning arena. A trust is simply an arrangement whereby one person holds legal title to an asset and manages it for the benefit of another. In one form or another it may be used in personal financial planning.

The ability of the trust to bridge the gap between life and death is one of its most remarkable characteristics. Through a trust, the person establishing it may rule from the grave, not forever, but to the extent the law allows. Generally a trust may be established to last for many generations ending 21 years after the death of the last named beneficiary.

Often, an individual will establish a trust for his own benefit, not necessarily for tax purposes, but for many other reasons. He may want investment management or he may want to invest in a new business venture with strong potential but high risk. He could then use the trust to assure himself of an income in the event of failure. He may set up a family trust with the primary purpose of observing its operation and then eliminate any deficiencies that might appear in actual operation. He may feel that while he presently is capable of managing his affairs, he is not sure about the future. In that case, a "standby trust" may serve a useful purpose.

On the other hand, trusts can be established for the benefit of others, such as a spouse, children, parents, or grandchildren. In addition, an individual may want to provide for beneficiaries with what may be regarded as missing elements in their abilities, experience or training.

This is clearly the case where minors, or others deemed legally incompetent, are the intended recipients. But trusts may be created for the benefit of responsible, competent adults too, for the same reasons the person establishing the trust may want to set up a trust for himself. These include freedom from management burdens, expert administration, mobility, and other practical reasons, the most important being cash savings.

While avoiding probate may be a consideration, the estate and gift tax savings made possible by the use of trusts is more important in many cases.

Use of the trust device can often permit a donor to transfer assets for the benefit of a beneficiary, while at the same time shielding such assets from the reach of creditors.

The laws of most states permit the creation of so-called "spendthrift trusts." Use of such trusts may permit the person establishing the trust to place both trust income and principal beyond the reach of the beneficiary`s creditors. For the most part, these laws prevent the beneficiary from assigning any part of the interest in the income or principal of the trust since most creditors look to property that could freely be assigned by the beneficiary. Their attempts to reach assets can be thwarted or at least made more difficult. The person establishing the trust is generally permitted to make free use of his own assets, even if the result is to prevent a beneficiary from dealing with the trust`s assets at will.

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