Overview of trusts; definitions and descriptions.

1. TRUSTS - Wha'!, Whv?
Definition - "A right of property, real or personal, held by one party for the benefit of another"
Real Property - real estate
Personal Property - cash, securities, jewelry, artwork etc,
Short Historv of the Trust Business
" Originated in the Middle Ages
. Part of English Cornmon Law, became basis for rnany laws in the U.S.
. Banks in the U.S. have been in the Trust business since the 18OOs
' Banks are governed and examined by State law or the Office of the Comptrotler of the
Currency ("OCC")
Trust LDL
7. Trust parties
A. Grantor/Settlor/Trustor - person who creates the trust,
B. Trustee - person or entity charged with managing the trust assets and administering the
trust (for the benefit of another).
C. Beneficiary - person receiving distributions from the trust.
D. Remainderman - person who receives what's left of the trust's property when it ends.
2. Trust Categories
A. Revocable - terms of the trust may be changed.
B. lrrevocable - terms of the trust may not be changed.
3. Trust types
A' Grantortrust-Grantor retains control overthe trust and thus any trust distributions are
taxed to the Grantor (i.e. on the Grantor,s form tO4O)"
B. Non Grantor trust - Grantor retains no control over the trust and the trust is subject to a
compressed tax schedule and files form 1041.
4. Trust Classifications - for tax purposes
A' Simple trust - a trust that distributes all of its annual income during a given year.
B' Complex trust - retains current income in the trust, distributes corpus or distributes to
charitable organizations.

2. 5. Trust Length
A. For lifetime of beneficiary or beneficiaries.
B. Generation Skipping
C. Distribution during lifetime - i.e.25%o at 30,25% at 40 and balance at 50
6. Distribution terms
A. Health, Education, Maintenance or Support ("HEMS")
B. lncentive Trusts - matching W-2 income etc.
C. lncome Only
7. Why set up a trust
A. Tax reasons
B. Disability Protection
C. Spendthrift and/or Creditor (including divorcing spouses) protection
8. Different kinds of trusts
o Revocable Living Trusts
o I rrevoca b le Tru sts
. Testamenta ry Trusts
o lrrevoca b le Life lnsu ra nce Trusts
o Charitable Trusts
. Court-Created Trusts - 1,42s and 1301,s
o Special Needs Trusts

3. Revocable LivinH Trust
Advantages
L. Disability Protection - ensure that your property remains available to be used for your benefit in
the event of your disability.
2. Probate Avoidance - benefit varies from State to State. Not a big deal in Texas
3, Ancillary Probate Avoidance - Helpful for property owned in another State.
4. Privacy - assuming the State doesn't require a copy (as part of the Probate Estate).
Disadvantages
1,. Re-registration of Property - assets/property/accounts must be re-registered in the name of the
Trust. Jewelry and cars can be problematic.
2. May Not Automatically Adapt to Changed Circumstances - in many jurisdictions wills change
automatically upon divorce, marriage or the birth of a child. Not so for Revocable Trusts.
3. Starting the Stature of Limitations (against estate creditors) may be delayed.
Myths
1,. "Revoca ble Trusts save taxes"
2. "Heirs cannot challenge a Revocable Trust"
3. "Revocable Trusts offer creditor protection"
4. "Makes a will unnecessary"

4. PROPERTY T
Fund with low basis assets
Chsritsble Remoinder Trust ("CRT")
2
TRUST
CHARITABLE BEN EFICIARY
4
I
3l
I
I
.'l,,
BENEFICIARIES
(typically to husband & wife for life)
FAMILY FOUNDATION
or
SPECIFIC CHARITIES
Client Benefits:
o Avoid immediate payment of capital gains tax (when transferring appreciated assets into the CRT)
. Realize gain on appreciated assets & diversify
. lncrease income received from appreciated assets
e Lessen estate tax - assets contributed are removed from your estate
o lmmediate lncome tax deduction is realized
. Control who receives your money

5. Chqritqble Lead Trust
Grantor
CLIENT'S
PROPERTY
Client Benefits:
o Large lncome Tax Deduction
o lncome taxed to Client
o Charity Benefits
o Assets return to Client after term is up
TRUST
(annual
a mount
specific
r term of years)
Fund with high basis assets

6. Charitable Leod Trust ("CLT")
4
PROPERTY L
Fund with High Basis Assets
HEIRS outright or in trust
3
Client benefits:
o Both Charity and Heirs benefit
c Assets removed from client's estate
. Heirs receive property free of estate taxes
o Lowe r , if n of e lim in ate, gift taxes
o client controls who receives his/her property
Non-Grontor
2
TRUST
CHARlTY

7. Trustee - lndividual or Corrnrate
Tvpical duties of a Trustee
1. Administer the Trust according to its terms - "follow the rules"
2. Fiduciary Duty - act in the best interests of all beneficiaries
3. lmpartial
4. Safeguard and secure the trust assets
5. Segregate the trust assets
6. Ensure trust assets are "productive"
7. Duty to account - keep accurate records & provide regular reporting to beneficiaries
8. Tax reporting - ensure annual tax return is prepared
Corporate Trustee (Bank or Trust Companvl
t. Expertise - provides such services "for a livingl' (all types of trust assets)
2. Financially strong (i.e. "deep pockets")
3. Does not typically "die"!
4. Unemotional
5. Can be "the bad guy", can contribute to lessening family conflict
6. Regular reporting (monthly/quarterly/annually)
7. Principal & lncome Accounting
lndividual Trustee
1. Usually lacks the expertise
2. Often lacks the time or inclination
3. Much less financially solvent than a corporate trustee - maybe 'judgment proof
4. Emotional - usually a relative of the beneficiaries
5. Typically hires others for assistance with trust asset management - brokers, real estate, oil & gas, CpA
6. Unpaid position generally
7. Comingling assets not uncommon
8. Regular reporting to beneficiaries is rarely provided
Many people believe that it is less expensive for an individual to serve as trustee than it is for a corporate entity.
ln reality, an individual will typically hire individuals (broker/investment person to manage the trust's financial
assets, real estate person and/or oil & gas person etc. to manage the unique assets). Those people often charge
more than a corporate trustee would to serve a$ trustee. The corporate trustee's fee covers not only trust asset
management services but administrative services as well. Also, some people believe that by naming an individual
as trustee "control" remains with the family. Control can easily stay within the family, even when there is a
corporate entity serving as trustee of a trust, by giving a family member the ability to replace the corporate
trustee (in the wording of the will or trust).