It’s a Trust Thing

Trusts come in many shapes and sizes.  One size does not fit all.  Which trust to use, or whether to use a trust at all, depends on the circumstances of each case.

Living Trust v. Testamentary Trust

A trust created and funded during one’s life is an “Inter Vivos” or “Living” trust.  A trust created in one’s last will and testament and funded at one’s death is a “Testamentary” trust.  The primary reason to create a Living Trust is to avoid probate, which is the process of transferring assets from the decedent to the beneficiaries.  Probate in New Jersey is normally not as Dickens portrayed in Bleak House.  However, Living Trusts are appropriate if you own real property outside of New Jersey because each parcel owned by a decedent must be probated in the state in which it sits.

Revocable v. Irrevocable

A trust that can be changed or eliminated at the trustor’s option is “Revocable.”  The “Trustor”, or the person establishing  the trust, can change his mind at any time and modify or void the trust.  With an “Irrevocable” trust, the Trustor must take a “hands off” approach as to the administration of the trust and the assets of the trust and the trust may only be modified or voided under certain circumstances.    The benefit of the Irrevocable Trust is that the “Corpus” or balance of an Irrevocable trust is not included in the Trustor’s estate at death and therefore not subject to estate taxes.  Additionally, the Corpus of an Irrevocable Trust is beyond the reach of the trustor’s creditors.  Funding an irrevocable trust is subject to the Federal gift tax.

Non-Tax Purposes

Trusts are established for non-tax reasons, such as to safeguard money for minor children, disabled persons and the children of prior marriages.

Tax Purposes

In addition to using trust for non-tax purposes, trusts are often used for tax purposes, such as to reduce or eliminate estate taxes.  Which trust to use depends on the nature of the assets transferred and what rights the Trustor wishes to retain.

Selecting Trustee

For some trusts, the Trustor may be the Trustee or “fiduciary.”  A spouse, family member or financial institution may be named as a trustee or co-trustee.

Benefits of Trusts

With trusts, you determine (1) the beneficiary of your property; (2) which property is to be transferred to that beneficiary; (3) the fiduciary to hold and manage your property; (4) the timing of the transfer to the beneficiary; and (5) the means to reduce the size of your taxable and probatable estate.

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