What is a Trust?
A trust is a legally binding document that details arrangements whereby a person (known as a trustee) holds property as its titular owner for the good of one or more minor beneficiaries.
Who Needs A Trust and Why?
Trusts are beneficial in several ways, including but not limited to, protecting assets for beneficiaries who are unable to assume possession at the time of the testator’s death and providing financial savings for the estate.
There are many reasons to set up trusts. This may be in order to ensure a beneficiary does not deplete funds over a short space of time or to ensure the fund last as long as they were intended to. Some reasons are:
- Asset Management
- Asset Protection
- Managing Distributions
- Elimination of Compulsory Succession
- Tax Exemptions
- Elimination of Fees
It is an option to appoint a trustee to manage assets in the event that the beneficiary or beneficiaries are unable or unwilling to manage the same themselves at the time of the death of the testator or subsequently. Whether by choice, disability or competence, in the event of a lack of appointed management by the beneficiaries, the trustee may continue to the management of the estate.
Protecting assets from creditors, estranged spouses or those that may exert undue influence over beneficiaries, a trust can be an effective vehicle. Due to the “fraudulent conveyance” legislation, transfer of assets to some trusts is prohibited to avoid claims. With professional guidance, our clients can rest assured that we have their best interests at heart.
In the event that beneficiaries are unfavorable asset holders, or do not possess the control of spending wisely, there is an option to release funds in trust in the form of an annuity. This option protects the beneficiary as well as the life cycle of the trust.
Upon death, an individual’s will is likely to be probated and becomes a public document, along with the all the value of the assets that forms your estate. Further, stakeholders may also be entitled, by law, to receive a copy of your will. A trust agreement, however, is a private document and the contents within can be kept confidential. Consequently, one may choose to replace or choose a trust as opposed to a will.
Elimination of Compulsory Succession
Legal battles are not uncommon when a relative or loved one feels that they were treated unfairly in the distribution of estate outlined in wills. In some instances, when the will is challenged, details can be changed by a process known as compulsory succession. A properly drafted trust will be able to eliminate this possibility in keeping the wishes of the testator of the trust.
Tax exemptions such as the Lifetime Capital Gains Exemption (LCGE) and the Principal Residence Exemption (PRE) can be accessed and is encouraged with trusts. For example, in the event that a trust owns some shares of a qualifying small business corporation, it may be possible to utilize the LCGE for each beneficiary. Likewise, if a trust owns a residential property, a sale tax using the PRE can be applied if at least one of the beneficiaries frequently takes residence at the home.
Elimination of Fees
Fees, such as probate fees are eliminated if assets held in trust fall outside of the domain of your estate. In this case, no fees are applicable.
Types of Trusts
Trusts help make it possible to protect yourself and loved ones. The main three types of trusts are;
1) Family Protection Trusts
2) Property Protection Trusts
3) Asset Protection Trusts
Family Protection Trust
Family protection trusts are trust used to protect funds for children and grandchildren. With family trusts, the individual does not own the money but remain in control of the funds therein. This type of trust is beneficial in securing funds against threats such as divorce, bankruptcy, lawsuits, among others. As with any legally and financially binding vehicle, there are associated advantages and disadvantages of family trusts. The disadvantages may outweigh the advantages for some, override the decision, however, depending on the individual’s situation or circumstance, the family trust may prove to be a saving grace. Some pros and cons are;
- Protects funds contained in the event of Bankruptcy
- Protects funds contained from claims in the event of divorce
- Protects inheritance for children and grandchildren from lawsuits
- Ensure familial succession of assets (for grandchildren or other children) upon the death of a child named in the trust.
- Provides asset management assistance for children who are unable or unwilling to manage their own assets.
- Permits the benefiting child or child’s spouse to qualify for public benefits without spending down inheritance
- Avoiding taxation of inherited assets upon benefiting child’s death
- Greater possibility of complications arising from holding separate trusts.
- Need to file Trusts require individual annual tax returns
- The success of the trust is dependent on whether the child adheres to stipulations of the trust.
- Stronger protection in the event that there is an independent trust holder. This can result in loss of control of the trust by the organizer and ongoing trustee fees.
- Very few benefits if the beneficiaries deplete the trust too quickly.
Protective Property Trusts
A protective property trust is used to transfer ownership of property assets to a trustee.
This trust is specifically designed for securing an individual’s lifetime gains. It ensures that property assets in this particular trust are protected from probate fees, from claims resulting from relationship failure, business debts, claims against your estate and more. It also safeguards property in the event that the individual or a family member needs residential care. A property protection trust can be added to a will.
With the transference of property into a trust, the ownership of the property is technically transferred as well to the beneficiary with the control of the trustee until such time that the beneficiary is able to assume control of the property, though the individual retains a lifetime’s interest in the property. Property that has been transferred from an individual is not classified as theirs, and as such, is omitted from any tests being conducted. This offers the individual a right of residence throughout the remainder of their life and the beneficiaries become the owner upon their death.
In the case of a married couple occupying the residence in trust, registration as tenants of the property is mandatory and each spouse’s share is registered as a separate entity. Upon the death of the first spouse, their interest is transferred directly into the trust.
It must be then written into the deed that the surviving spouse retains or has acquired the right to continue to live on the property for the remainder of life, and or is entitled to receive profits of any rental thereof. In the event of a sale of the property by the surviving spouse, they will retain their half of the proceeds; however, the half of the deceased spouse remains safely in trust for the beneficiary.
The specific properties make a protective trust a favorable option for individuals or married couples with the concern that their child or children may become disinherited upon their death.
Later- Life Care
In the event that a person needs care later in life and needs to enter into a home and there is a shortfall in the funds available or the income compared to pay for this care, the government can demand that assets such as vehicles, property, stock, etc. be sold in order to meet the shortfall in payment for this care. A property held in trust is not categorized as a part of the individual’s estate, and as such cannot be confiscated for any reason as such.
Asset Protection Trust
An asset protection trust safeguards for intended beneficiaries assets by way of negating probates, reducing tax liabilities for children or beneficiaries and providing protection under the Court of Protection control, should control of assets be lost, thereby resulting in financial savings for the estate holder. This trust was designed to avoid undue hindrances and liabilities in the protection of estates. Assets protection trusts may also;
- Provide protection funds contained in the event of Bankruptcy.
- Provide protection funds contained from claims in the event of divorce.
- Provide protection against other claims on an estate.
- Provide protection on inheritance for children and grandchildren from lawsuits.
- Protects inheritances for the intended beneficiaries and safeguards against unintended beneficiaries claiming an inheritance.
- Protects against inheritance taxes upon the death of the individual.
The Roc and Co. Advantage
At Roc and Co. Estate Planning, all our protection trusts are designed to protect assets throughout the lifetime of the individual. These trusts enable you to securely pass on your in-tact or agreed upon divided estate and inheritances among the people and causes closest to you with your tailored specifications. We are a team of highly qualified specialists here to help you efficiently plan your estate and its management, ensuring that your children and their inheriting properties and estates are safeguarded.