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At Martin Heller Potempa & Sheppard, PLLC, we help many clients understand and establish various types of trusts. While we understand the ins and outs of trusts, we know that not everyone does, and hearing different terms related to trusts can be confusing if you don’t know what they mean. This is why our trust attorneys have created a vocabulary list of different terms you might come across if you’re considering establishing a trust. Here is trust-related terminology that you may need to familiarize yourself with.
The person, or persons, who creates the trust. In some documents, the Grantor might be called the “Trustor” or “Settlor”. They all mean the same thing. Some trusts continue to create trusts for other people.
For instance, grandparents may have a trust that at their death creates trusts for their children. Then, later at a child’s death, create a trust for their grandchildren, then that grandchild’s children. For all these trusts, the grandparents are the Grantors because they created the original trust that all the others came from.
The person, people, or company in charge of the trust’s day-to-day activities. The Trustee is the one with all the power over the trust assets. The Trustee is a fiduciary in that he/she needs to act for the benefit of the trust beneficiaries and not him/herself. Sometimes this creates a difficult situation when the Trustee is also one of the beneficiaries.
The person, or people, who can receive the benefit of the assets held by the trust. Assets in the trust can be distributed directly to a beneficiary or “used for their benefit.” This means that if the trust owns a house, the beneficiaries can live in it. It also means that the trust can make a distribution for a beneficiary.
For instance, if the trust pays for a beneficiary’s college tuition, the trust can write the check directly to the school. It does not have to first give it to a beneficiary and then have the beneficiary give it to the school.
4. Trust Property
Trust Property includes both real and personal property, and Trust Income. Many people misunderstand what personal property includes. They think personal property is the same as household items. But, personal property is essentially everything that is not real property. Examples include a bank account, ownership in a business, stock portfolio, and a CD.
5. Trust Income
This is an accounting concept that includes money received by the trust due to the trust’s ownership of trust property. This includes dividends, interest, rent, and royalties. It does not include the appreciation or growth in trust principal. While the trust pays capital gain tax on the sale of appreciated property, capital gains are not considered trust income. This is an important concept. If the trust directs that all “income” be distributed to the beneficiaries, it does not include the gain recognized on the sale.
6. Trust Principal (not Trust Principle)
The property contributed to the trust and its appreciation or growth. Similar to Trust Property, but is really more of denoting the assets that were contributed to, or put into, the trust.
7. Estate Tax
This is a tax imposed on the transfer of a person’s wealth at his or her death. Sometimes the word “estate” is used in too many ways. People confuse the concept of a probate estate and a taxable estate. A decedent’s probate “estate” refers to only the property that passes through the probate process. A decedent’s taxable estate includes everything a person owns. The probate estate is part of the taxable estate.
For instance, a decedent’s IRA passes by a beneficiary designation and is not part of the probate estate. But as the IRA is owned by the decedent, it is part of the decedent’s taxable estate.
The locale or location, usually the state, where the trust property is considered to reside. The situs is important in determining the laws that apply to the trust. The trust document will establish the trust’s situs as the client’s state of residence. Sometimes a trust document will allow the situs of the trust to change. This can be helpful as the client or a beneficiary moves from one state to another.
A situation when a Trustee is deemed to not be able to continue in the position of the Trustee. The client’s status of being disabled or incapacitated is most often certified by a written statement from a doctor.
10. Successor Trustee
Person, persons, or entity that becomes the Trustee when the previous Trustee is no longer serving. Generally, a Trustee ceases to serve as a result of the Trustee resigning, becoming disabled, dying, or being removed.
11. Spendthrift Clause
A provision of a trust agreement that protects the trust property from some of the beneficiaries’ creditors.
12. Restated Trust
A trust agreement that has been fully re-written.
13. Per Stirpes
A distribution concept in which the trust property is divided (i) equally among the person’s family branches, and (ii) then in each family branch, to the people of each branch who are the closest degree of kinship to the person. For example, if a person has three living children, then there are three branches. In a per stirpes distribution pattern, each child is allocated a 1/3rd portion.
But what if one child dies before the person, leaving surviving children, who are the person’s grandchildren? Under a per stirpes concept, even though the child has predeceased, there is still a family branch existing from this child, through the living grandchildren. As such, dividing the assets by family branch still results in three equal 1/3rd portions. For the deceased child’s portion, his/her children are now the closest degree of kinship to the client in that family branch. Thus, if the child has two children, then the deceased child’s 1/3rd portion is divided equally between his/her two children. In this case, each of the grandchildren ends up with 1/6th of the assets (1/3 x 1/2).
A report prepared periodically (usually annually) by the Trustee and distributed to the beneficiaries that identifies the trust’s balance as of the beginning of the reporting period, the additions to the trust during that same period, the distributions or payments during that same period, and the ending balance at the end of the period.
15. Testamentary Limited Power of Appointment
This is the power granted to a beneficiary to alter the distribution pattern at the beneficiary’s death. For instance, a trust may instruct that at a child’s death, the remaining trust assets are divided equally for that child’s children. If the child has a testamentary limited power of appointment for his/her descendants, then the child can alter this distribution pattern. With this, the child could, for example, reduce the portion for one child and increase the portion for another, or even allocate some trust assets away from the children and in favor of grandchildren.
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If you want to establish a trust for a loved one, let Martin Heller Potempa & Sheppard, PLLC guide you through the process. We can answer any questions you have about establishing a trust and help with any other matter related to estate planning.
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