Family Trusts

American trusts can be described as diverse and varied. Broadly speaking, there are two types of trusts: living trusts and testamentary trusts. What is commonly referred to as family trusts and personal trusts are both living trusts.

Trust is a legal concept originated from the common law system, which means that the principal entrusts his legally held property or property rights to the trustee based on his trust in the trustee, and the trustee manages and disposes of the property or property rights in the trustee's own name according to the principal's wishes, so as to obtain benefits for the principal and the beneficiaries.

Trusts are classified from the perspective of the principal and can be divided into Living Trusts and Testamentary Trusts; Living Trusts are further divided into Revocable and Irrevocable Trusts.

Classification according to the function of the trust, such as Dynasty Trust and Irrevocable Life Insurance Trust (ILIT).

Based on the principal's control over the assets within the trust, it can be classified as a Revocable Trust and an Irrevocable Trust.

Generally speaking, a trust has five main elements: the principal, the trustee, the beneficiary, the thing entrusted to the trust, and the trust document.

Revocable trusts can be changed, revoked, and changed freely at any time, but do not avoid estate taxes, while irrevocable trusts transfer assets directly to the beneficiaries and the creator has no right to make further changes without the consent of the beneficiaries, while the trust assets are not subject to estate taxes. There are many other more complex types of trusts, which vary depending on the circumstances.

A credit shelter trust, also known as a roundabout trust or family trust, because estate taxes are set above a certain amount, the creator can transfer the excess to the trust and the trust assets are no longer subject to taxation. This is a common type of probate planning for passing on assets to family members or children.

Child gift trusts, property trusts established specifically for children, where a designated trustee holds and manages the trust property to meet the child's educational and other important expenses. The IRS, in an effort to encourage parents to establish child trusts, also grants a specific tax exemption of $11,000 per year for trust gifts. The benefit of a child trust is that the beneficiary sub-trust business and market daughter can enjoy the property but not have free rein over it, thus helping to prevent the children from wasting the property when they are not capable of taking care of themselves.

A divorce maintenance trust, specifically a trust with a divorced spouse as the beneficiary, is designed to pay alimony to a vulnerable divorced spouse. The divorced spouse receives regular alimony payments under the terms of the trust without access to the entire estate. Another purpose is to prevent people with bad intentions from taking advantage of the marriage to obtain large sums of money.

Life insurance trusts, where life itself is a form of security for future generations, allow the insured to transfer the beneficiary rights of the life insurance policy directly to the beneficiary of the trust, thus avoiding the scope of estate tax. However, in order to avoid the three-year rule in the U.S. tax law, the transfer of an existing insurance policy must still be subject to estate tax if the insured dies within three years, as it is suspected of intentional tax avoidance. According to scholars, about 3% to 4% of life insurance policies in the U.S. are placed in trusts.

Benefits of Family Trusts

  • A family trust can separate the assets held from those of the beneficiary, thereby ensuring that the trust assets are not subject to recovery by creditors in the event of bankruptcy or prosecution of the beneficiary, or making it more difficult for creditors to recover.
  • Family trusts provide the flexibility to distribute trust income to beneficiaries, thereby reducing tax costs. By distributing income or capital to multiple eligible beneficiaries at reduced marginal tax rates, the total tax cost paid by a family whose income is distributed by a family trust is significantly reduced.
  • When conditions are met, losses from a family trust can be carried forward into the next fiscal year to help reduce future tax liability.
  • Where the trust has a reasonable beneficiary structure and holds assets for more than 12 months, the trust will be entitled to a 50% capital gains tax discount on capital gains arising from the disposal of assets.