President-elect Donald Trump has recently announced that his business holdings will be placed in a blind trust in the care of his three oldest children. Trump’s holdings include real estate, hotels, golf courses, and numerous other investments in the United States and abroad. While Trump, through his attorneys, refers to the arrangement as a blind trust, scholars are quick to point out that the trust will not be managed be an independent party, a requirement for blind trusts. As the Trump trust issue unfolds, we wanted to revisit trust basics and the interests they serve.
A trust can be created during the life of the maker of the trust (the settlor) or upon his or her death through a will. A trust created through a will is known as a testamentary trust. There are many types of trusts and they serve a multitude of purposes.
Trusts can be either revocable or irrevocable. In a revocable trust, the settlor can modify or take back their assets without penalty. In contrast, an irrevocable trust cannot be modified and assets cannot be taken back by the settlor. Revocable and irrevocable trusts have important legal and tax ramifications.
Blind Trusts
A blind trust is a financial vehicle that allows public officials to place their assets under the management of an independent party, often a bank. Officers and directors of corporations can also make use of a blind trust. This arrangement is designed to avoid potential conflicts of interest for the public official, and to avoid the appearance of impropriety.
The problem with Trump’s proposed plan is that his children, who will manage the trust, are not true independent parties, and it is possible for Trump to exercise a degree of control over his assets. The blind trust differs substantially from other types of trusts. In the most basic form, a trust transfers assets from a person to the trust and create rights in those assets for a third party beneficiary.
Living Trusts
A living trust is created during the lifetime of the settlor, and is subject to modification and revocation. Living trusts are useful in avoiding the potentially expensive and time-consuming probate process. Assets in a living trust may transfer to beneficiaries more quickly than assets having to pass through probate. Living trusts are often cost-effective to administer. As an additional benefit, your assets remain private. In contrast, a will that moves through the probate process is part of the public record. A living trust also helps to manage the affairs of the settlor in the event he or she becomes incapacitated and can no longer manage his or her own affairs.
As the name suggests, the settlor may revoke their assets from the trust at any point in time. A revocable trust, however, does not protect assets from creditors or the IRS because the assets can be accessed by the settlor. Because of the many benefits, living trusts have become an important tool for many people in crafting their estate plan. When setting up a living trust, the attorney usually drafts a secondary legal instrument known as a pour-over will, to transfer any assets that were not properly transferred through the trust. Living trusts are effective for many estates, both large and small.
When a settlor creates an irrevocable trust, the trust cannot be modified and the assets cannot be accessed by the settlor. Because of this, the assets in an irrevocable trust are beyond the reach of creditors, and the irrevocable trust is an effective tax planning strategy for large estates.
Trusts for Minors & Spendthrift Trusts
Many people create trusts to provide for minor children, individuals who lack management skills, or adults with special needs. Because an outright gift would be infeasible in these circumstances, a trust created for the benefit of others can serve the settlor’s intentions.
Parents can create a trust for the benefit of their minor children. Most minors lack the maturity to effectively manage property and, more importantly, do not have legal capacity to manage financial affairs in most instances. A trust allows the settlor to provide for the minor children without the child having control over the gift.
Many young people who reach the age of majority still lack the judgment and maturity to manage financial assets. By utilizing a trustee who has investment experience, the settlor can ensure someone is taken care of for a long period of time. These types of trusts are often called spendthrift trusts. A carefully drafted spendthrift trust is beyond the reach of the beneficiary’s creditors. A spendthrift trust ensures that large assets are not quickly squandered.
Special Needs Trusts
Leaving assets to a loved one with special needs requires careful planning. A special needs trust can ensure the special needs person continues to receive Supplemental Security Income and Medicaid benefits. Without a special needs trust, a substantial testamentary gift to an adult special needs person can impair their ability to collect social security income. Because property is left to the trust, and not the special needs person, they are still eligible for important benefits.
Special needs trusts continue until the trust assets are exhausted or until the beneficiary’s death. The trustee, whom you select, can take care of a variety of personal expenses for the special needs loved one, including, but not limited to, education, personal care attendants, vacations, and out of pocket healthcare.
Trusts are designed to meet a specific need and are tailored to the client. As special circumstances of the client arise, an experienced trust attorney can design a trust to meet the needs of the client. For more information on trusts and estate planning, contact our experienced Huntsville, AL attorneys at Martinson & Beason, P.C. today.