Trust Law In A Nutshell™

Thinking Of Setting Up A Trust?

This page will help you understand, learn, and evaluate whether you and your family could benefit from setting up a trust.

What is a Trust?

Here's the definition of a trust, according to the IRS: In general, a trust is a relationship in which one person holds title to property, subject to an obligation to keep or use the property for the benefit of another.
Here's the definition of a person, according to the IRS: The IRS defines a person as an individual, corporation, partnership, trust, or estate - which means that any one of those "persons" can be a grantor, trustee, or beneficiary.
Here's a more detailed definition, according to the IRS: A trust is a three-party arrangement in which the founder of the trust (commonly known as the donor, grantor, or settlor) transfers legal title of the trust property (a res) to a trustee (a fiduciary with respect to the property) to hold and to manage for a third party (the trust's beneficiary) in accord with the grantor’s intent.
Requirements: A trust must have a founder (grantor or settlor), must have a trustee (person managing assets), and must have a beneficiary (person who benefits from the trust) to exist.

Who is a Grantor?

The IRS defines the Grantor as:

Any person who either:
- Sets up a trust
- Funds a trust
- Transfers assets to the trusts
- Transfers cash to the trust
- Transfers income to the trust

Approach taken by the IRS:

The IRS looks at "substance over form" to determine whether someone will be considered to be a grantor of the trust.

This means that if you and/or your partner transferred assets or income (directly or indirectly) into the trust, you will be considered a Grantor of the trust, even if the trust documents calls you something else, such as a "trustee" on the trust document.

Why is this important:

There are quite a few trust "promoters" in the marketplace who promote trust structures where you (the client) will be a trustee of a trust, but the promoters encourage you to transfer assets, business interests, or even income into a trust without being called a grantor (the trust names another person as the grantor, usually a neighbor or friend and names you as the trustee).

PAY CLOSE ATTENTION:

The IRS looks at real-life transactions (substance) over the paper definitions (form).

If you set up, funded, or transferred assets, cash, interests, shares, etc. into a trust for anything other than fair market value - YOU ARE THE GRANTOR!!!

Who is a Beneficiary?

According to the IRS:

The beneficiary is the individual or entity who will receive the benefits of the trust property.
The beneficiary holds the beneficial title to the trust property.
The trust document must clearly identify the beneficiary or beneficiaries.
A trust CANNOT exist without a beneficiary.

What kinds of trust do you need?

There are hundreds of different kinds of trusts: Each one is created for a different purpose and to accomplish different objectives: estate planning, avoiding probate, reducing taxes, protecting property, creating anonymity, protecting an asset or IP, preserving assets, etc.
Each trust operates differently:
- Some are required to be registered with the court (statutory) and some that do not (private)
- Some take effect during one's life (living trust) and some that kick-in after death (testamentary)
- Some give a lot of discretion to a trustee (discretionary) and some that do not
- Some require a distribution of income every year (simple) and some that do not (complex)
- Some allow the grantor to be a trustee and maintain control of trust assets (grantor-trust) and some that require independent trustees to govern the trust assets (non-grantor trusts)

Word of caution:

There is NO one-size-fits-all structure when it comes to trusts - each person's situation and goals are different and each trust should be created to suit those goals and objectives
Do not fall for a "fill-in-the-blank" trust structures that are NOT customized to your exact needs - most of those trust structures do not contain the "fine print" that could actually "make or break" your trust structures

What trust structure do you need?

It depends on many factors, including (but not limited to):

Liability and risk reduction
Asset and income protection
Asset and wealth management
Wealth preservation and transfer
Tax deduction and income splitting
Anonymity and privacy in transactions
Growth and diversification of your portfolio
Control and ownership of assets and wealth
Protection of family heirlooms or assets
And many other factors that are related to the preservation of income or wealth

Each and every "goal, objective, desire, or wish" produces a different outcome, and the terms of the trust have to ensure those wishes are met with the right clauses and language that is in line with state and federal law.

If this starts to get more "complicated" than you had imagined - good - that is the reason we created this page and have outlined all these factors.

Trust taxation and accounting

Here are some basic "thumb rules" to keep in mind:

A trust CANNOT be used to reduce income or taxes that is attributable to the grantor
Trusts CANNOT be set up for the main or sole purpose of tax reduction or tax breaks
Trusts CAN be setup to avoid certain types of taxes - like probate or inheritance taxes
Trusts are liable for taxes just like every other "person" in the tax code: an individual, corporation, nonprofits, associations, partnerships, or estates
Trusts may need to have an independent "economic" purpose in order to have a separate and independent identity that is not attached to the grantor (not an alter-ego of the grantor)
Trusts may need to file their own tax forms (not all trusts need to file tax forms)
Trust accounting is highly specific to the trust being created - there is NO one size fits all definition
The concept own nothing, control everything applies to a very specific type of trust (grantor trust - where the grantor maintains control)

Trust compliance and requirements

Here are some of the basic requirements to have a valid trust agreement:

At least 1 "identifiable" grantor, trustee, and beneficiary have to exist
A trust needs to be funded with something to exist (assets, cash, title to property, etc.)
A trust will be the extension of the grantor if they maintain control and ownership - this is called the grantor trust
A trust may be independent of the grantor if they are willing to give up ownership and control - this is a non-grantor trust that is run by independent trustees
Compliance can relate to:
- legal compliance (minutes, forms, filings)
- record-keeping (transactions, documents, decisions, proposals)
- book-keeping (bank transactions, balancing the books)
- tax compliance (filing tax forms, paying taxes)
- Financial decisions (proposals, minutes, due diligence)
- banking and money flow (sound practices)