Trusts

AUTHORITY:
Tenn. Code Ann. Sections 55-3-118, 55-4-101

DESCRIPTION:

  • A trust is a legal agreement associated with three parties.
    • A “Trustmaker” is the person who creates the trust agreement, also commonly referred to as the Grantor, Trustor or Settlor.
    • A “Trustee” is the person or entity responsible for managing the property that the Trustmaker decides to title in the name of the trust.
    • A “Beneficiary” is the person or entity who is to receive the benefits of the property titled in the name of the trust.
  • Under this type of legal arrangement, the Trustmaker will transfer ownership of certain assets to the Trustee who will manage the assets for the benefit of the Beneficiary.

Living Trusts vs. Testamentary Trusts:

  • When comparing living trusts with testamentary trusts, if the trust has been created to go into effect during the Trustmaker's lifetime, then it is referred to as an "inter vivos trust" or "living trust."
  • On the other hand, if the trust has been created to go into effect only after the Trustmaker dies, it is referred to as a "testamentary trust."
  • If a trust is created under the terms of a Last Will and Testament, it is a "testamentary trust".
  • Knowing the difference between revocable and irrevocable trusts is crucial.

Revocable Living Trusts:

  • A Revocable Living Trust, also called a Revocable Trust or Living Trust, is simply a type of trust that can be changed at any time.
  • Revocable Living Trusts are flexible. The down side to a revocable trust is that assets funded into the trust will still be considered personal assets for creditor and estate tax purposes.
  • This means that a revocable trust offers no creditor protection if you're sued and all assets held in the name of the trust at the time of your death will be subject to both state and federal estate taxes.
  • There are three (3) common reasons given for using a Revocable Living Trust:
    • To plan for mental disability - Assets held in the name of a Revocable Living Trust at the time a person becomes mentally incapacitated can be managed by their Disability Trustee instead of by a court-supervised guardian or conservator
    • To avoid probate - Assets held in the name of a Revocable Living Trust at the time of a person’s death will pass directly to the beneficiaries named in the trust agreement and outside of the probate process
    • To protect the privacy of your property and beneficiaries after you die - By avoiding probate with a Revocable Living Trust, the trust agreement will not become a public record for the entire world to see and read
  • Phase One of a Revocable Living Trust: The Trustmaker is Alive and Well:
    • While the Trustmaker is alive and well, the trust agreement will have specific provisions allowing the Trustmaker to manage, invest, and spend the trust assets for his or her own benefit. Thus, the Trustmaker will go about business as usual with regard to assets that have been funded into the trust, except that the Trustmaker will sign as the "Trustee" instead of as an individual. The Trustmaker will also be able to use his or her own Social Security Number as the taxpayer identification number for the trust and file income taxes on IRS form 1040 instead of form 1041.
  • Phase Two of a Revocable Living Trust: The Trustmaker Becomes Mentally Incapacitated:
    • The trust agreement will also specify one or more procedures to be followed if the Trustmaker becomes mentally incapacitated. If the Trustmaker is determined to be mentally incompetent and can no longer properly serve as Trustee, then the trust agreement will name a successor "Disability Trustee" to take over the management and investment of the trust funds from the Trustmaker. The Disability Trustee will then be able to take care of and manage all of the Trustmaker's finances (assuming all of the Trustmaker's assets have been funded into the trust) and pay the Trustmaker's bills.
  • Phase Three of a Revocable Living Trust: The Trustmaker Dies:
    • When the Trustmaker dies, the 'Administrative" or "Successor Trustee" will be able to step in and pay the Trustmaker's final bills, debts, and taxes. The trust agreement will then contain instructions about who will receive the balance of the trust funds after all of the bills have been paid and the Administrative Trustee will distribute the balance accordingly.
  • How a Revocable Living Trust Avoids Probate:
    • Since the assets funded into a Revocable Living Trust during the Trustmaker's lifetime will no longer be owned by the Trustmaker but by the Trustee of the trust, there will be no need for the trust assets to be probated when the Trustmaker dies. Instead, the Administrative Trustee can proceed with settling the trust outside of probate and without any court supervision or interference.
  • Vehicles in Revocable Trust:
    • In situations where a motor vehicle is transferred to a trust, avoiding probate will normally save substantial costs, probate court fees, and time and maintain privacy. Probate court is open to the public.
    • A revocable trust has no sales tax applied to the transfer. But, for an irrevocable trust, sales tax is due on the fair market value because an irrevocable trust is an entirely separate legal entity.
    • The living Trust may be during the lifetime of the donor or upon their death. The trustee and the successor trustee are the legal owners of the title. The creation of a valid trust involves a transfer of title to the trustee and any subsequent change of ownership involves another transfer. When the trustee and subsequent trustee are the same person, there is still a change of legal ownership. Each time there is a transfer of ownership, the new owner, as an individual, must apply for title and register the vehicle.
    • In most cases the Trustmaker, Trustee and Beneficiary will be one in the same person therefore they may keep the same plate/registration or Disabled Placard.    

Irrevocable Trusts:

  • An irrevocable trust is simply a type of trust that can't be changed after the agreement has been signed, or a revocable trust that by its design becomes irrevocable after the Trustmaker dies.
  • With the typical Revocable Living Trust, it will become irrevocable when the Trustmaker dies and can be designed to break into separate irrevocable trusts for the benefit of a surviving spouse, such as with the use of AB Trusts, or into multiple irrevocable lifetime trusts for the benefit of children or other beneficiaries.
  • Irrevocable trusts can take on many forms and be used to accomplish a variety of estate planning goals:
    • Estate Tax Reduction
      • Irrevocable trusts, such as Irrevocable Life Insurance Trusts, are commonly used to remove the value of property from a person’s estate so that the property can't be taxed when the person dies. In other words, the person who transfers assets into an irrevocable trust is giving over those assets to the trustee and beneficiaries of the trust so that the person no longer owns the assets. Thus, if the person no longer owns the asset, they will not be taxed when the person later dies.
      • As mentioned above, AB Trusts that are created for the benefit of a surviving spouse are irrevocable and, thus, can make full use of the deceased spouse's exemption from estate taxes through the funding of the B Trust with property valued at or below the estate tax exemption. Then, if the value of the deceased spouse's estate exceeds the estate tax exemption, the A Trust will be funded for the benefit of the surviving spouse and payment of estate taxes will be deferred until after the surviving spouse dies.
    • Asset Protection
      • Another common use for an irrevocable trust is to provide asset protection for the Trustmaker and the Trustmaker's family. This works in the same way that an irrevocable trust can be used to reduce estate taxes - by placing assets into an irrevocable trust, the Trustmaker is giving up complete control over and access to, the trust assets and, therefore, the trust assets can't be reached by a creditor of the Trustmaker. However, the Trustmaker's family can be the beneficiaries of the irrevocable trust, thereby still providing the family with financial support, but outside of the reach of creditors. There are also irrevocable trusts called Self-Settled Trusts or Domestic Asset Protection Trusts that in some states, including Alaska, Delaware, Nevada, and Tennessee, offer creditor protection and allow the Trustmaker to be a trust beneficiary.
      • NOTE: In addition, as mentioned above, the various irrevocable trusts that can be created for the benefit of the Trustmaker's surviving spouse or other beneficiaries after the Trustmaker of a Revocable Living Trust dies can be designed to offer asset protection for the trust beneficiaries.
    • Charitable Estate Planning
      • Another common use of an irrevocable trust is to accomplish charitable estate planning, such as through a Charitable Remainder Trust or a Charitable Lead Trust. If the Trustmaker makes the initial transfer of assets into a charitable trust while still alive, then the Trustmaker will receive a charitable income tax deduction in the year that the transfer is made. Or, if the initial transfer of assets into a charitable trust doesn't occur until after the Trustmaker's death, then the Trustmaker’s estate will receive a charitable estate tax deduction.

Revocable Trusts vs. Irrevocable Trusts:

  • If the trust is a revocable trust, then in most cases the Trustmaker, Trustee, and Beneficiary will be one and the same person. The two most common uses of a Revocable Living Trust are to plan for mental disability and to avoid probate of the assets that have been funded into the trust prior to the Trustmaker's death.
  • A Revocable Living Trust, also simply called a Living Trust, is a legal document that is created by an individual, called a Trustmaker, to hold and own the Trustmaker's assets, which are in turn invested and spent for the benefit of the Trustmaker as the Beneficiary by a Trustee. In most cases, the Trustmaker will also be the Trustee, although some wealthy individuals may choose to have an institution manage their trust property. A Revocable Living Trust covers three phases of the Trustmaker's life: while the Trustmaker is alive and well, if the Trustmaker becomes mentally incapacitated, and after the Trustmaker dies.
  • If the trust is an irrevocable trust, such as an Irrevocable Life Insurance Trust, then in most cases the Trustmaker cannot be the Trustee and Beneficiary, otherwise the purpose of the irrevocable trust will be defeated. The most common use of an irrevocable trust is to move assets out of the Trustmaker’s name and down to the next generation for their use and enjoyment, which in turn will reduce the value of the Trustmaker’s estate for estate tax purposes.

REQUIREMENTS:

RELATED TOPICS:
INHERITANCE
AFFIDAVIT OF INHERITANCE
DEATH CERTIFICATE
EXECUTOR OF ESTATE
LETTERS OF ADMINISTRATION
NOTICE OF TESTAMENTARY

 

 

 

 

 

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