Friday, February 8, 2013

FAQs About Trusts

Is property in trust beyond the reach of creditors of the beneficiary of the trust?
As a rule property held in a spendthrift trust for the benefit of a judgment debtor is beyond the reach of the creditors if the trust was created and funded in good faith by a person other than the debtor. The rule does not apply when the trust is so set up or funded as to hinder, delay, or defraud creditors. Nor does it apply when the debtor created the trust for the debtor's own benefit: Put another way, a "self-settled" trust is invalid as a spendthrift trust in Illinois. And even a legitimate spendthrift trust is liable for the unpaid child support obligations of a beneficiary-debtor. Are there tax benefits to trusts.

Are there tax benefits to trusts?

Transferring property into trust does not make tax obligations disappear. Income generated by trust assets will be taxable to the trust, to the person who created it (known as the settlor or the grantor), to the beneficiary, or to some combination thereof. Any doubt that many people have erroneously thought otherwise over time is dispelled by the treatment which the Internal Revenue Service has given to this subject. (See "Abusive Trust Arrangements" in 2011 Instructions for Form 1041 at p. 3).

In theory, trusts are subject to other taxes, too, among them the so-called "death taxes" and "inheritance taxes." In practice, those taxes are relevant only to the few: the current exemptions are $5.25 million in the case of the federal estate tax, gift tax, and generation-skipping transfer tax; $4 million for the Illinois estate tax; and double that for married couples.
There are many good reasons for establishing a trust, but they do not have much to offer in terms of reducing or eliminating income tax liability.

Why should I create a trust?
One good thing a trust can do is reduce or eliminate the risk of guardianship proceedings. In a typical "living trust" the settlor will designate himself or herself the trustee, and will designate a successor trustee in case he/she dies or becomes disabled. Should the initial trustee become disabled, a simple resignation is all it would take to put the "back-up" trustee in charge; and the fees, the paperwork, the trips to court, the delay and all the rest of what goes into obtaining a guardian of the estate could be avoided.

No comments:

Post a Comment

Note: Only a member of this blog may post a comment.