1. Copyright © 2011, Stephen Haas. All Rights Reserved. Ch. 1: What is a Trust? Ownership of any asset normally includes the right to control it and the right to benefit from it. Ownership of any asset normally includes the right to control it and the right to benefit from it. A trust splits ownership of its assets: A trust splits ownership of its assets: Legal ownership Legal ownership Equitable ownership Equitable ownership The purpose of a trust is to hold assets for the ultimate benefit of a person or class of people without giving the beneficiary immediate access to the trust assets. The purpose of a trust is to hold assets for the ultimate benefit of a person or class of people without giving the beneficiary immediate access to the trust assets.

2. Copyright © 2011, Stephen Haas. All Rights Reserved. Parties to a Trust Grantor Grantor Establishes the trust but retains no interest in the trust assets Establishes the trust but retains no interest in the trust assets Trustee Trustee Holds legal title to the trust assets Holds legal title to the trust assets Wields control over the assets and is responsible for them Wields control over the assets and is responsible for them Beneficiary Beneficiary Ultimate beneficial owner of the trust assets Ultimate beneficial owner of the trust assets Equitable “owner” of the trust assets Equitable “owner” of the trust assets

3. Copyright © 2011, Stephen Haas. All Rights Reserved. Trust Formation Identification of the parties Identification of the parties Grantor, trustee and beneficiary Grantor, trustee and beneficiary One person can fill multiple roles One person can fill multiple roles Ex. The grantor can sometimes be the trustee and the trustee is often one of the beneficiaries Ex. The grantor can sometimes be the trustee and the trustee is often one of the beneficiaries Except that the beneficiary and trustee cannot be exactly the same or the trust merges and is extinguished Except that the beneficiary and trustee cannot be exactly the same or the trust merges and is extinguished Trust res Trust res Required for living trusts Required for living trusts Though this can often be a nominal amount only Though this can often be a nominal amount only Not applicable for testamentary trusts since the trust doesn’t take effect until the testator dies Not applicable for testamentary trusts since the trust doesn’t take effect until the testator dies Signatures of grantor and trustee Signatures of grantor and trustee Many states require witnesses or notarized signatures Many states require witnesses or notarized signatures

4. Copyright © 2011, Stephen Haas. All Rights Reserved. Trust Agreement Most trusts are based on written agreements. Most trusts are based on written agreements. It is almost never advisable to intentionally create an oral trust in the first instance. It is almost never advisable to intentionally create an oral trust in the first instance. However, an oral trust agreement is not inherently invalid. However, an oral trust agreement is not inherently invalid. Ex. Bob gives $1,000 to Jane and says “Please hold this for Joan.” This is a trust arrangement. Ex. Bob gives $1,000 to Jane and says “Please hold this for Joan.” This is a trust arrangement. Without the writing, a court can still infer the existence of a trust for fairness or equitable reasons. There include: Without the writing, a court can still infer the existence of a trust for fairness or equitable reasons. There include: Constructive trusts Constructive trusts Implied trust Implied trust

5. Copyright © 2011, Stephen Haas. All Rights Reserved. Revocable Trusts Completely flexible and revocable by the grantor. Grantor can: Completely flexible and revocable by the grantor. Grantor can: Amend the trust Amend the trust Take money out of the trust Take money out of the trust Change the beneficiaries Change the beneficiaries Revoke the whole trust Revoke the whole trust Etc. Etc. Sometimes referred to as a ”will substitute” Sometimes referred to as a ”will substitute” It is comparable to a will in that it does little until the death of the grantor It is comparable to a will in that it does little until the death of the grantor Grantor is often the initial trustee Grantor is often the initial trustee Backup trustees are named for the grantor’s disability or after the grantor’s death Backup trustees are named for the grantor’s disability or after the grantor’s death

6. Copyright © 2011, Stephen Haas. All Rights Reserved. Revocable Trusts - Advantages Probate Avoidance Probate Avoidance Problems associated with probate Problems associated with probate Delay in administration and distribution after death Delay in administration and distribution after death Legal fees in bringing the proceeding Legal fees in bringing the proceeding Public nature of the proceeding Public nature of the proceeding Court supervision Court supervision Bond requirement Bond requirement Opportunity for interested parties to challenge a will Opportunity for interested parties to challenge a will Disability planning Disability planning Since the trustee can take over if the grantor is disabled, there is no need to Since the trustee can take over if the grantor is disabled, there is no need to Bring a guardianship proceeding which is expensive and time consuming Bring a guardianship proceeding which is expensive and time consuming Rely on a power of attorney, which many banks may not respect Rely on a power of attorney, which many banks may not respect

7. Copyright © 2011, Stephen Haas. All Rights Reserved. Revocable Trusts - Disadvantages Expense at time of formation, including Expense at time of formation, including Legal fees Legal fees Filing fees for deeds Filing fees for deeds Hassle of funding the trust initially Hassle of funding the trust initially If the revocable trust is not funded with all or substantially all of the grantor’s assets, you may have to bring a probate proceeding anyway, thus nullifying the main point of the trust! If the revocable trust is not funded with all or substantially all of the grantor’s assets, you may have to bring a probate proceeding anyway, thus nullifying the main point of the trust! Sometimes lack of court supervision can be a bad thing, especially when there’s a potential for abuse or disagreements among the heirs. Sometimes lack of court supervision can be a bad thing, especially when there’s a potential for abuse or disagreements among the heirs.

8. Copyright © 2011, Stephen Haas. All Rights Reserved. Irrevocable Trust The grantor may not revoke or amend or modify the trust. The grantor may not revoke or amend or modify the trust. The grantor may retain some control over the trust assets, however, depending in the purpose of the trust. The grantor may retain some control over the trust assets, however, depending in the purpose of the trust. Irrevocable Trusts are often used for one or more of the following purposes Irrevocable Trusts are often used for one or more of the following purposes Medicaid or other benefits eligibility planning Medicaid or other benefits eligibility planning Estate Tax Planning Estate Tax Planning Creditor protection Creditor protection

9. Copyright © 2011, Stephen Haas. All Rights Reserved. Testamentary Trust This means a trust set up by a will. This means a trust set up by a will. It takes effect upon the death of the testator It takes effect upon the death of the testator Common Examples: Common Examples: Credit Shelter trust Credit Shelter trust Marital trust Marital trust Trust for benefit of minors Trust for benefit of minors All of these can be established by a trust (revocable or irrevocable) after the death of the grantor in addition to being established by a will. All of these can be established by a trust (revocable or irrevocable) after the death of the grantor in addition to being established by a will.

10. Copyright © 2011, Stephen Haas. All Rights Reserved. Trusts that can hold S Corporation Stock The general rule is that only individuals can be shareholders of S Corp stock. The general rule is that only individuals can be shareholders of S Corp stock. Since a client may hold S Corporation shares, a trust that cannot hold these shares may be an incomplete estate planning took. Since a client may hold S Corporation shares, a trust that cannot hold these shares may be an incomplete estate planning took. Trusts that can hold S Corporation stock include: Trusts that can hold S Corporation stock include: Grantor trusts Grantor trusts These trusts are treated as being entirely owned by the grantor for income tax purposes These trusts are treated as being entirely owned by the grantor for income tax purposes Qualified Subchapter S Trust (“QSST”) Qualified Subchapter S Trust (“QSST”) Electing Small Business Trust (“ESBT”) Electing Small Business Trust (“ESBT”)

11. Copyright © 2011, Stephen Haas. All Rights Reserved. Qualified Subchapter S Trust (“QSST”) Requirements for a trust to qualify as a QSST: Requirements for a trust to qualify as a QSST: There can be only one income beneficiary There can be only one income beneficiary The income beneficiary must be a U.S. resident The income beneficiary must be a U.S. resident All income of the trust must be distributed to the income beneficiary at least annually All income of the trust must be distributed to the income beneficiary at least annually Principal can only go to the one beneficiary Principal can only go to the one beneficiary Though the discretion as to whether to distribute is can remain with the trustee Though the discretion as to whether to distribute is can remain with the trustee The income interest must last until the trust termination or the beneficiary’s death The income interest must last until the trust termination or the beneficiary’s death (whichever is earlier) (whichever is earlier) The trust must file an election to be treated as an eligible S Corporation shareholder The trust must file an election to be treated as an eligible S Corporation shareholder Income from a QSST is taxed as income to the beneficiary. Income from a QSST is taxed as income to the beneficiary.

12. Copyright © 2011, Stephen Haas. All Rights Reserved. Electing Small Business Trust (“ESBT”) Similar to the QSST Similar to the QSST Advantages over the QSST Advantages over the QSST The ESBT may have multiple beneficiaries The ESBT may have multiple beneficiaries The income can be allocated by the trustee among multiple beneficiaries and it may be accumulated rather than districuted. The income can be allocated by the trustee among multiple beneficiaries and it may be accumulated rather than districuted. Disadvantage Disadvantage Taxed at the highest marginal income tax rate for individuals Taxed at the highest marginal income tax rate for individuals (35% as of 2011) (35% as of 2011)