TrusteeMarketplace.ORG is designed to help family or corporate trustees find the right legal and financial advisors to help them with their needs. If you are new to the world of trustees, then we suggest you review some of the terminology that we find can be confusing. So, below are some of the typical terms or types of trusts you may find you are responsible for.
Question #1: Are you a trustee of company’s benefit plan, or your family’s trust?
If you are a company’s trustee, please skip to Question # 6
Question #2: As a family trustee, are you the owner of the trust, or are you a relative or family friend of the owner?
If you are the Owner of the Trust, you are typically involved in revocable Trust, AND a Living or Inter vivos trust. Only Revocable or Living/Inter Vivos trusts permit the trust owner/grantor to be both the beneficiary, and trustee. Living Trusts are different from a Testamentary Trust. Irrevocable trusts do not allow the Trust Owner/Grantor the right to be a trustee AND beneficiary.
Question #3: What is the difference between a Living Trust and a Testamentary Trust?
Living trusts are created to go into effect during the Trust owner's/grantor’s lifetime, which is also referred to as an "inter vivos trust" or "living trust." If the trust has been created to go into effect only after the Trust owner or grantor dies, usually under the terms of a Last Will and Testament, then it is referred to as a "testamentary trust.”
Question #4: What is the difference between a Revocable Trust and an Irrevocable Trust?
A Revocable “Living Trust” typically addresses three conditions of the Trust owner's/grantor’s life 1) while the Trust owner/Grantor is well and alive, 2 When or if the Trust owner/Grantor becomes mentally incapacitated, and 3) after the Trust owner/grantor dies. In most cases, the Trust owner/grantor, is also the Trustee, and Beneficiary. The two most common uses for a revocable trust are to plan for mental disability and to avoid the probate court system.
An irrevocable trust, such as an Irrevocable Life Insurance Trust, has requirements that the Trust owner/Grantor cannot be both the Trustee and Beneficiary; otherwise the benefits of the irrevocable trust will be void. The most common use of an irrevocable trust is when the trust owner(s)/grantor(s) transfers their assets out of their name to pass these assests to their next generation for their use and enjoyment. As a result, this transfer will reduce the value of the Trust Owner’s/grantor’s estate for estate tax purposes. Irrevocable Trusts usually have a tax benefit that requires a separate trustee. And as the word is defined, an Irrevocable trust is designed to be not revoked or dissolved easily.
Question #5: What other kinds of trusts are there for Families that require a separate Trustee from the Trust Owner/Grantor?
Some of the most common types of trusts family trustees are as follows:
- CRT or Charitable Remainder Trust is an irrevocable trust typically funded with highly appreciated property. The CRT is usually structured so that the trust owner/grantor is the current beneficiary, and a future or remainder beneficiary is a qualified charity, such as a private foundation. The CRT usually provides for the named beneficiary, or grantor, to receive either a fixed amount each year or a percentage of the value of the trust each year, for a period of years that can be for the individual's life or for a period not to exceed 20 years. CRT’s are commonly used to "fund" a private foundation, while retaining the benefits provided by a CRT.
- Generation-Skipping Trust or Dynasty Trusts transfer family assets to the Trust Owner’s/ grantor's grandchildren, not the grantor's children. The children of the grantor never take title to the assets, permitting the grantor to avoid the estate taxes issues.
- Grantor Retained Annuity Trust (GRAT): GRAT is an irrevocable trust that a trust owner/grantor transfers (typically) a large financial asset into a trust, as a gift to avoid gift taxes, and receives an annual payment from the trust for a time period specified in the trust document. At the end of the specified time period, the financial property is then transferred (tax-free) to the named beneficiaries who are not the trust owner/grantor.
- Incentive Trust: An Incentive trust uses distributions from income or principal as an incentive to encourage or discourage certain behaviors on the part of the beneficiary. Incentive trusts require fixed conditions and behaviors for beneficiaries to have access to trust funds from discretionary trusts that leave such decisions up to the trustee.
- Personal Injury Trust: A personal injury trust is any form of trust where funds derived from payments made in consequence of a person’s injury are held by trustees for the benefit of that injured person.
- QTIP Trust or "Qualified Terminal Interest Property." A type of trust commonly used by trust owners/grantors who have children from another marriage. QTIPs enable the grantor to look after his or her current spouse and ensure that the assets from the trust are then passed on to beneficiaries of his or her choice, such as the children from the grantor's first marriage.
- Spendthrift Trusts are used to protect beneficiaries (for example, one's children) against their own inability to handle money. Typically, the restrictions for the trust have to do with the beneficiaries reaching a certain age before distributions or transfer of ownership is made.
Question#6: What is the difference between a directed or discretionary trustee?
A Directed Trust means certain decisions of the management of the trust is directed by a group or beneficiaries. The Directed Trustee's role is usually administrative which involves following investment instructions, holding legal title to the trust assets, providing fiduciary and tax accounting, coordinating trust participants and offering dispute resolution among the participants.
A Discretionary Trust means the trust is managed by a Discretionary Trustee, who has open and independent discretion on managing the trust.
Question #7: How does company sponsored trusts differ from family trusts?
The main difference in trust structure for the beneficiaries and the grantor. The grantor is usually the company or board of directors, and the beneficiaries are employees. Trustees are many times employees or senior executives of the company. ERISA law in the US places high levels of liability on trustees to properly manage the plan assets, such as a 401k, Profit Sharing Plan, or ESOP. Institutional trustees (or trust departments of a bank) for a retirement plan require different knowledge and expertise in comparison to a family trust. TrusteeMarketplace.ORG is designed to help family or company trustees find the best advisors to mitigate their fiduciary liabilities.
Question #8: As a Trustee of my family’s or company trust, how much liability do I have?
Trustees, with their inherent expectations by the courts of law, have unlimited liability in their role of properly maintaining the trust’s assets. While fiduciary Insurance is available to cover legal expenses, any breaches in fiduciary duty have very little protection. It is imperative a trustee be able to defend themselves on knowledge and execution of the duties of care, loyalty and prudence. TrusteeMarketplace.ORG has a list of advisors to help you navigate through the requirements you are now responsible for meeting. DirectorsMarketplace.ORG can also provide training and testing for selected trustees.
Question #9: Why should I hire or engage with an independent or institutional trustee?
Trustees, with their inherent unlimited liability, and having the duty to properly maintain assets, require a proper amount of training and education to keep up with various tax laws and reporting requirements. Missing a filing date can cost thousands of dollars in penalties and fees, let along losing the tax deductions that go with a trust. In addition, if family members or employees are in conflict with you as the trustee, further potential liability and emotional strain can distract you as a trustee in properly managing their assets. TrusteeMarketplace.ORG is designed to help you identify the best institutional trustees for your family’s or company trust.