Trusts: From the Crusades to Pampered Pets

The benefits of employing the right trust structure go well beyond minimizing taxes.

By Seamus Smith

Trusts primarily originated out of a need for management of Crusaders’ lands while they were off at war and unavailable. Trusts are now commonly thought of as a tool for just the wealthy, but you don’t need to be a Crusader or a multi-millionaire to benefit from using a trust.

A trust is essentially a bucket that holds assets. Trusts are usually established by a written agreement. The assets within the bucket are used and administered as directed within the written  agreement.

Every trust involves three primary parties. The grantor or settlor creates the trust. The beneficiaries receive the benefit of the trust assets pursuant to the trust agreement. The trustee administers the trust assets pursuant to the trust agreement for the beneficiaries’ benefit. The trustee acts in a fiduciary capacity and must  exercise the trustee’s powers in a manner that is in the beneficiaries’ best interest.

Revocable trusts, sometimes called living or inter vivos trusts, are a common estate-planning tool to avoid probate and direct the distribution of assets at the settlor’s death. While the settlor is living, the settlor retains full control over the trust and its assets, including the ability to amend or revoke the trust.

Due to the extent of the settlor’s control, the trust is effectively ignored for income-tax purposes, and all income related to the trust assets is reported directly on the settlor’s income-tax return.

A last will and testament can be used to address the distribution of property at death just like a revocable trust. However, a last will and testament inherently involves the probate court, while a revocable trust can avoid it. Probate is generally undesirable because it takes time and incurs attorney and court fees. It can result in a lack of privacy as well because of the public nature of most court proceedings.

Irrevocable trusts have many uses, but are often used for estate and gift-tax planning. An irrevocable trust can be established to receive gifts and then shelter those gifts from estate tax at the settlor’s later death. Along the same purpose, life insurance is often owned through an irrevocable trust to shield the policy proceeds from the estate tax.

The federal estate tax affects very few people at this time because it exempts an individual’s first $11.58 million assets from the tax. However, under current law, the exempt amount will be reduced by half as of Jan. 1, 2026.

Assets in excess of the exemption amount that are not left to a spouse or charity are taxed a rate of 40 percent. Gifts to irrevocable trusts must be made cautiously because lifetime transfers count against the exempt amount and reduce what can be left at death free of estate tax.

A certain type of irrevocable trust, a self-settled asset-protection trust, can be used in certain jurisdictions and in certain circumstances to shield a settlor’s assets from creditors, even though the settlor is a beneficiary of the trust. These trusts were traditionally created in foreign countries, but several states have enacted laws allowing the trusts to now be established domestically.

Despite the name, irrevocable trusts can sometimes be modified. The trust agreement itself may include a mechanism for adjusting the terms. Changes can often be made through the court system. Some states even provide options for non-judicial modifications and decantings.

A non-judicial modification allows changes with the consent of the settlor and beneficiaries, while a decanting  is transfer of assets  from an old trust to a new trust with similar but not identical terms.

This flexibility can be beneficial in addressing changes in law,
taxation and the needs of the beneficiaries. Some trusts are created for a very particular purpose. Pet trusts hold assets to care for a beloved non-human family member.

The most famous example is a trust established by Leona Helmsley for the benefit of her Maltese, Trouble. It was alleged to be initially funded with over $10 million and provided extravagant care for Trouble, including flights on private jets.

Gun trusts hold certain types of regulated firearms. Various forms of charitable trusts help further charitable endeavors while minimizing income and estate taxes.

While you probably don’t need a trust to manage your feudal lands while crusading, trusts remain a useful tool in several other circumstances.

About the author

Seamus Smith is a lawyer with Creative Planning Legal in Leawood, Kan.
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