Protecting assets with a trust

Text size: aA aA aA
Generally speaking, a trust is a legal entity that allows someone to transfer the legal title of that asset to one person while assigning the benefit of the asset to another. The person who creates the trust, the original owner of the asset, is known as the grantor. The person who manages the trust is known as the trustee. And the person who receives the benefits is known as the beneficiary.
The trust's grantor names a trustee to handle investments and manage trust assets. Depending on the type of trust, the grantor can retain the right to make some or all decisions regarding the trust.
A trustee may be an individual such as an attorney or accountant, or it may be an entity that offers experience in such areas as taxation, estate tax law, and money management. Trustees have a responsibility — known as "fiduciary responsibility" — to act in the beneficiaries' best interests.

Trust categories

Trusts are drafted as either revocable or irrevocable and may take effect during your lifetime or after death.
  • Revocable trusts can be changed or revoked at any time. For this reason, the IRS considers any trust assets to still be included in the grantor's taxable estate. This also means that the grantor must pay income taxes on revenue generated by the trust and possibly estate taxes on those assets remaining at the time of his or her death.
  • Irrevocable trusts cannot be changed by the grantor once they are executed. The assets placed into a properly drafted irrevocable trust are generally removed from a grantor's estate for federal estate tax purposes. Depending on the terms of the trust, income and capital gains taxes incurred by the trust may be paid by the grantor or by the trust and/or the beneficiaries. Upon a grantor's death, the assets in the trust generally are not considered part of the estate and therefore not subject to estate taxes.
Most revocable trusts become irrevocable at the death or disability of the grantor.

Benefits of a trust

Although trusts can be used in many ways, they are most commonly used to:
  • Control assets and provide security for both the grantor and the beneficiaries.
  • Provide for beneficiaries who are minors or require expert assistance managing money.
  • Minimize the effects of estate or income taxes.
  • Provide expert management of estates.
  • Minimize probate expenses.
  • Maintain privacy.
  • Protect real estate holdings or a business.
Most people use trusts to help maintain control of assets while they're alive and medically competent, as well as provide a way to control of the disposition of assets if they're medically unable to do so or in the event of death.

Trusts offer flexibility to meet your needs

Different kinds of trusts are designed to meet different needs and objectives. The examples that follow are some of the types that may be available to you.
A living trust allows the grantor to remain both the trustee and the beneficiary of the trust while he's alive. Upon death, a designated successor trustee manages and/or distributes the remaining assets according to the terms set in the trust, avoiding the probate process for assets in the trust. In addition, should the grantor become incapacitated during his lifetime, the successor or co-trustee can take over management of the trust.
An irrevocable life insurance trust (ILIT) is often used as an estate tax funding mechanism. Under this trust, the grantor makes gifts to an irrevocable trust, which in turn uses those gifts to purchase a life insurance policy. Upon death, the policy's death benefit proceeds are payable to the trust, which in turn provides federal income tax-free cash to help beneficiaries meet estate tax obligations.
A qualified personal residence trust (QPRT) allows grantors to potentially remove their residence from their estate, and reduce federal gift taxes, while using the home for a predetermined number of years, after which time ownership is transferred to the remainder beneficiaries or trusts for their benefit. Any gift tax incurred from giving away the property is discounted because the grantor still has rights to the house during the term of years spelled out in the trust. The potential drawback is that if the grantor dies before the term of the trust ends, the home is considered part of the grantor's estate. Additionally, if the grantor wishes to continue using the residence after the end of the trust term, he will have to pay rent to the beneficiaries (or trusts) that now own the residence.
A generation-skipping trust can benefit multiple generations of the grantor's family and can last as long as permitted by state law. By allocating the grantor's generation-skipping transfer tax exemption ($12.06 million in 2022), distributions from the trust to grandchildren and more remote descendants can be exempt from the generation-skipping transfer tax, which is a flat rate of 40%.
A charitable lead trust (CLT) serves two purposes: helping benefit a favorite charity today and benefiting non-charitable beneficiaries in the future. This trust lets you pay one or more charities a fixed amount or percentage of trust assets for a designated amount of time, after which the remaining trust property goes to the beneficiaries, who receive the property free of federal estate taxes. However, keep in mind that you may need to pay federal gift taxes on a portion of the value of the assets you transfer to the trust.
A charitable remainder trust (CRT). A charitable remainder trust (CRT) allows a grantor to retain a right to receive a fixed amount or percentage of trust assets for the term of the trust (or designate one or more other people to receive it) and leave the assets to charity at the end of the trust term. The grantor may be entitled to a federal income tax charitable deduction for a portion of the assets contributed to the trust. The trustee can sell trust property without immediately incurring federal income tax, but all or a portion of the distributions to the non-charitable beneficiaries may be subject to federal income tax. Highly appreciated assets are typically the used to fund a CRT.

© SS&C. Reproduction in whole or in part prohibited, except by permission. All rights reserved. Not responsible for any errors or omissions.

The material was authored by a third party, DST Retirement Solutions, LLC, an SS&C company ("SS&C"), not affiliated with Merrill or any of its affiliates and is for information and educational purposes only. The opinions and views expressed do not necessarily reflect the opinions and views of Merrill or any of its affiliates. Any assumptions, opinions and estimates are as of the date of this material and are subject to change without notice. Past performance does not guarantee future results. The information contained in this material does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation, offer or solicitation for the purchase or sale of any security, financial instrument, or strategy. Before acting on any recommendation in this material, you should consider whether it is in your best interest based on your particular circumstances and, if necessary, seek professional advice.

Because of the possibility of human or mechanical error by SS&C or its sources, neither SS&C nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall SS&C be liable for any indirect, special or consequential damages in connection with subscriber's or others' use of the content.
Merrill, its affiliates, and financial advisors do not provide legal, tax, or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.