Everyone has heard the term “trust fund” and assumes that trust is the sort of thing used by the very wealthy to pass on and preserve assets for their heirs. But in fact, trusts are created and used by ordinary people for a number of different reasons. Learn about what a trust is and what a trust can do for you, and determine whether you need to create a trust.
A trust is a legal, fiduciary arrangement whereby a person, called the trustee, holds property as its nominal owner for the benefit of a third person or persons, called the trust beneficiary or beneficiaries. The person who creates the trust is called the “settlor” or “grantor” who transfers title to the property to the trustee “in trust.” The trustee, in turn, administers the trust according to the wishes of the grantor.
Trusts are not just for wealthy people. To the contrary – anyone seeking privacy in their financial affairs and to provide for heirs and save them money can create a trust to:
This is the sort of trust most commonly used by wealthy couples who need to take advantage of their joint estate tax exemption. In 2019, the estate tax exemption was $11.4 million per person and $22.8 million for married couples.
When one spouse dies, the assets remain in trust and the surviving spouse receives income from the trust until he or she dies. Then, the trust beneficiaries receive the trust assets without having to pay estate taxes.
Charitable Remainder Trusts provide income to the beneficiary or beneficiaries for an amount of time specified in the trust documents. At the expiration of that time period, the remaining trust assets are distributed to a charity or charities specified in the trust documents.
Perfect for spouses that want to avoid probate for reasons of privacy, an “A” trust is created when one spouse dies. The surviving spouse receives income from the trust, and when the surviving spouse passes the principal or “corpus” of the trust passes to the couple’s heirs.
A “revocable” trust may be amended or revoked at any time by the grantor, which an “irrevocable” trust cannot be amended or revoked by the grantor.
A trustee is appointed as part of the trust documents to administer the assets in trust for the benefit of the beneficiaries.
The trustee has a fiduciary responsibility to the grantor, which means that the trustee is bound to act only in the best interests of the trust and must follow the grantor’s instructions regarding investment and distribution of funds held in trust.
It varies. Trustees are entitled to “reasonable” compensation regardless of whether the trust documents provide for compensation. Professional trustees such as lawyers, financial institutions, and trust management companies will charge between 1% and 1.5% of assets held in trust per year, and this will vary according to how much the trust is worth.
A successor trustee takes over a revocable living trust if the grantor dies or becomes incapacitated. The successor trustee will distribute the assets of the trust to the beneficiaries if the grantor dies. If the grantor is incapacitated then the grantor’s job is ongoing for the length of the grantor’s incapacity.
More than one successor trustee may be appointed, in which case they are called co-successor trustees. What each co-successor trustee is paid in fees by the trust will vary state-to-state. Most typically, a state will dictate either that co-successor trustees split a reasonable fee, or that they each receive the amount they would have received if the only trustee.
Again, where the fee is not specified in the trust documents, a successor trustee is entitled to be paid “reasonable” fees, which will vary according to the value of the trust and how complex the trust is to administer and/or settle. State law dictates what fee is “reasonable” under the circumstances.
Successor trustees can be paid a specific dollar amount or a percentage of the value of the assets held in trust, in which case those payments are taxable as ordinary income. In the alternative the grantor can bequeath a successor trustee a certain amount, saving the successor trustee some money in taxes as bequests are not taxable as income.
If a successor trustee has paid some of the grantor’s expenses out-of-pocket, prior to gaining control of the trust assets, he or she is entitled to be reimbursed apart from and in addition to the fees received for administering the trust. These expenses might include, among others:
A successor trustee is also entitled to be reimbursed for travel expenses, mileage, office supplies, and any other necessary expenses for the administration of the trust.
If you have an issue with the fees the Trustee is receiving, that dispute will be governed by state law. Beneficiaries can file suit and a court will determine whether the fees are unreasonable.
Hopefully, this article helped you to determine whether you need or want to place your assets in trust as part of your estate plan, and what you can do as beneficiary if you question the Trustee’s fee.
About the Author
Veronica Baxter is a blogger and legal assistant living and working in the great city of Philadelphia. She frequently works with Todd Mosser, Esq., a busy Philadelphia appeals attorney.
©2011-2023 Worthy, Inc. All rights reserved.
Worthy, Inc. operates from 25 West 45th St., 2nd Floor, New York, NY 10036