What a Trust Can Do for You

Unless you are the beneficiary of one, you may not know a whole lot about trusts. In the right situation, a trust can be a great financial planning tool.

A trust is a legal arrangement between the person who sets up the trust and transfers property to it (the "grantor) and the individual or institution that agrees to manage the trust (the "trustee"). The grantor specifies who is to benefit from the trust ("the beneficiaries"), names the trustee, and spells out how the trust assets are to be managed in the legal document creating the trust.

Trusts are used for many purposes.

To Reduce the Size of an Estate: There's no guarantee that Congress will extend or make permanent the one-year repeal of the federal estate tax that is slated for 2010. So, you still may be interested in reducing the size of your estate to minimize potential estate taxes.

A grantor retained annuity trust (GRAT) is one strategy that can work well. With a GRAT, you give assets with the potential for appreciation to your child (or another family member), usually with minimal gift-tax consequences. The assets are held in a trust for a set term. You receive an annuity from the trust. When the trust term ends, your child receives the assets. If you outlive the trust term, the value of the assets - including appreciation - isn't part of your estate.

To Protect Assets from Creditors: A divorce or major lawsuit could strip your child of his or her inheritance. A trust can include "spendthrift" provisions that prevent the beneficiary from assigning his or her interest in the trust to creditors. Putting assets in trust for your child instead of giving them to your child outright may be a good way to provide protection.

To Donate to Charity: With a charitable remainder trust , you receive an income from the donated assets for life or a set number of years. When the trust ends, the charity gets the assets. With a charitable lead trust , the charity receives an income from the assets for the time period you specify. After that, the assets are returned to your family. Both trusts offer tax advantages.

Copyright 2004 by NPI.
Used by permission