A trust is created when you (settlor or trustor) transfer property to someone else (trustee) to be managed and distributed for the benefit of another or others (beneficiaries). Trusts are a flexible planning tool facilitating the transfer of property with retained or specified restrictions. While the different types of trusts approach infinity, some of the more common types are summarized below.
These trusts are often called “Totten Trusts” and are sometimes useful to provide for a beneficiary without the expense of drafting a custom trust instrument. However, a custom instrument modifying some of the statutory provisions or the provisions of the account agreement provided by the bank is often advisable to accomplish your objectives. The terms of an unmodified bank trust are as set out in the Connecticut General Statutes § 36a-296 and the agreement you sign with the bank that establishes the account. The statute provides generally as follows:
- To create the trust you (depositor) deposit money in a separate account over which you keep control by being the only person who can make withdrawals.
- If the beneficiary dies while the account is open, the trust terminates and you own the account free of trust obligations.
- If you die before the beneficiary, the trust terminates and the beneficiary owns the account free of trust restrictions.
If this type of bank trust is established for a minor beneficiary it will most often have more extensive provisions set out in the bank agreement you sign upon establishing the account. Money you deposit in a bank trust account remains in your taxable estate for estate and generation skipping transfer tax purposes. Money deposited in a bank trust account does not constitute a taxable gift to the beneficiary for gift tax purposes. We recommend that you have your legal counsel review all such bank trust agreements to insure that bank trust accounts fit your estate planning goals.
Some of our clients want to benefit charitable and religious beneficiaries, but desire to balance that goal with a desire to benefit themselves and their families. Trusts can provide the means to obtain such a balance. The most common charitable trusts are briefly described as follows:
- Charitable remainder trusts allow you and sometimes other family members to retain an income stream while receiving an income tax benefit for the charitable remainder that your selected charitable beneficiary or beneficiaries receive at your death or the death of the other family members you designate. These trusts are generally of two types: charitable remainder unitrusts and charitable remainder annuity trusts. You or other family members retain the right to receive a set percent of the value of the trust property revalued each year in the case of the unitrust. You or other family members retain the right to receive a set periodic payment in the case of the annuity trust. There are many variations of these basic remainder trusts and the tax law is complex.
- Charitable lead trusts allow you to give a current income stream to your favorite charity while having the property come back to you or family members at some time in the future. Like a remainder trust, the lead trust can be either in the form of a unitrust or an annuity trust with the charity receiving the unitrust amounts or the annuity payments. This is a complex area of the law. Although many charitable and religious organizations have prototype trusts you can consider, we recommend you have your own independent legal counsel review any prototype and advise you prior to signing.
Money or property you transfer to yourself or someone (the custodian) for the benefit of a person under the age of 21 years pursuant to the Connecticut Uniform Transfers to Minors Act (Connecticut General Statutes §45a-4-546 – §45a-561) are in a virtual trust for the benefit of the young person (beneficiary). These transfers can be useful to impose restrictions on money or property intended for the benefit of an immature person without the expense of establishing a custom trust for the beneficiary. The terms of the custodial arrangement are generally as follows:
- Transfers are irrevocable gifts to the beneficiary subject to control by the custodian until the beneficiary reaches the age of 21.
- There can be only one person or institution serving as custodian at any one time but you can name successor custodians to serve upon the death, incapacity or resignation of the custodian.
- A custodian must keep custodial property separate for his or her own property, must invest and reinvest the property for the benefit of the beneficiary exclusively and must make periodic disclosures to the beneficiary upon the beneficiary reaching age 12.
- The custodial assets must be distributed to the beneficiary upon his or her 21st birthday or to the beneficiary’s estate if the beneficiary dies prior to age 21.
We find the major reasons our clients reject custodial property and favor custom drafted trusts are to extend trust provisions for younger beneficiaries beyond age 21 to a more mature age and to provide specifications in a trust as guidance to the person in charge of making distributions for the benefit of the beneficiary. If the custodian is someone other than yourself, the transfer is a taxable gift for gift and generation skipping transfer tax purposes, and generally removes the property from your estate for estate and generation skipping transfer tax purposes provided the transfer occurs more than 3 years from date of your death.
Dynasty trusts are designed to preserve family wealth for several generations and avoid the shrinkage that usually occurs in large estates from estate, gift and generation skipping transfer taxes. Connecticut law allows for such a trust to last for 100 years and it is possible to invoke the law of other states to have such trusts last much longer.
Living trusts are usually revocable trusts you set up for the benefit of family or others while retaining control to amend the trust, to revoke it entirely and to change the trustee who manages the trust. The assets in such trusts are a part of your estate for federal and state estate tax purposes, and for purposes of calculating Connecticut probate court fees. They are often over marked as avoiding probate when in actuality Connecticut law requires the person handling your affairs at death to file the trust instrument and inventory in the probate court and to pay probate court fees based on the value of the trust assets as well as your other assets owned outside the trust. Living trusts are a useful tool to accomplish many estate planning goals, but be alert to false or exaggerated claims that they avoid probate or eliminate probate expenses.
Testamentary trusts are created in your will and can control distributions from your estate so that the distributions are managed and controlled by a trustee acting in accordance with the trust provisions in your will. Sometimes it is best to have probate court supervision of a trustee and it is easy to invoke that supervision by use of a testamentary trust. Many of our clients with minor children have trust provisions in their wills to provide for a trustee to manage the child’s inheritance until a mature age when the trust terminates and any remaining property is distributed to the adult child free of trust. In the meantime the trust provisions usually allow the trustee discretion to spend for the child’s support while a minor, health and education.Without trust provisions, beneficiaries you designate in your will who are under the age of eighteen do not receive a direct distribution at your death. Absent trust provisions, the probate court will appoint a guardian to handle the minor’s assets until the beneficiary reaches the age of eighteen when the guardianship ends. If your will does not designate a guardian, the probate court will make the selection.
Most of what you can accomplish by a living trust you can accomplish with a testamentary trust. However, a testamentary trust does not provide for your own needs prior to death. A will is effective at your death and never controls your assets during your lifetime.