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| > The Practice > Practice Builder |
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| Using Trusts to Maximize Financial Plans |
| by
Judith A. Hasenauer
| 11-05-09 |
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The creation and use of trusts is a subject that is near and dear to lawyers and has been an active part of the practice of law for generations. Originally, the concept of a trust was unique to the Anglo/American system of common law but in recent years has been more widely accepted in jurisdictions that do not accept common-law principles.
Insurance agents have used trusts to act as the legal owners of life insurance policies for at least as long as there have been income and estate taxes. The use of a trust with life insurance can shift ownership of valuable assets to keep them out of a decedent's estate for purposes of estate and inheritance taxes. Trusts are also invaluable when used with certain types of business insurance transactions. Unfortunately, the general public is not always as knowledgeable about trusts and their uses as are lawyers and insurance agents.
In the United States, most jurisdictions easily permit the creation of trusts so long as a few simple rules are followed:
* The purpose of the trust must be legal.
* There must be a subject of the trust--i.e. an asset.
* There must be a person to establish the trust - usually called a "settlor," or a "grantor," or sometimes a "trustor."
* There must be a trustee who indicates a willingness to act as such.
Although there are numerous banks and trust companies that act as commercial trustees, it is also common for individuals to act as trustees, so long as they are not doing so as a commercial enterprise. Trusts are usually created by the execution of a written document that is usually referred to as an "indenture" or "trust agreement." However, trusts are also created by operation of law in situations where a court will require the imposition of a trust where it would be unconscionable not to do so.
Simply stated, a trust is a legal arrangement where the legal ownership of as asset or group of assets is separated from the beneficial enjoyment of the asset. The legal ownership is vested in the trustee and the beneficial ownership is enjoyed by someone else--a beneficiary. The beneficiary can be the settlor of the trust or a third person. It is not unusual for the settlor of a trust to name himself as trustee of the trust, keeping legal ownership of an asset he already owned, but for the benefit of someone else. Trusts can be created while the creator is alive (referred to as an "inter vivos" trust) or to begin after the creator has died (referred to as a "testamentary" trust) established by the creator's will.
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Judith A. Hasenauer, JD, CLU is an attorney with the law firm of Blazzard & Hasenauer, P.C. She devotes her practice exclusively to the financial services industry, developing sophisticated financial products. She also advises clients on broker-dealer and investment advisory activities and on technological developments in the use of electronic processing of financial services transactions.
The author is not an employee of Morningstar, Inc. The views expressed in this article are the author's. They do not necessarily reflect the views of Morningstar. |
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