A Trust can help you manage your taxes and protect your assets more efficiently. With a trust structure, the trust owns your assets, and you can then distribute the benefit of those assets to yourself or beneficiaries. A trust is made up of several parties, and each serves a different role. If you need help choosing a trustee, you should speak to an estate planner in Northern Virginia.
What is a Trust?
A trust is a legal arrangement. Under this arrangement, a trustee holds and manages assets for the benefit of one or more beneficiaries. The beneficiaries may receive benefits of the trust’s assets through income or other proceeds that the trustee distributes.
[Related: Post Election Estate Planning]
Why do I need a Trust?
Due to the nature of the legal arrangement, a trustee has a great deal of control over the trust. There can be more than one trustee. Trusts are not separate legal entities, but they are treated as separate for tax purposes. Generally, a trust is used to hold assets for protection and tax benefits. These tax benefits are because the trustee can make income distributions to beneficiaries who sit in different tax brackets.
Who Can Be a Trustee?
The person or company who legally holds the trust’s assets is the trustee. The trustee holds these assets as trustee for the trust, for the benefit of beneficiaries. Normally, a trust deed will outline the trustee’s powers and provide a formal governing document for the trust. It should state that the trustee owns the trust’s assets and makes distributions to beneficiaries. However, a trustee may have additional duties, including:
- Act in good faith (meaning honestly and without intent to deceive)
- Keep proper books and records
- Carry out the trust’s terms
- Exercise reasonable care in the administration of the trust
- Avoid a conflict of interest
- Not benefit from his/her position as trustee (except where provided under the trust terms)
Choosing a trustee is a very important part of your estate planning. It can be a difficult task, but here are some things to consider:
An individual trustee is a person who manages a trust. Title to the trust assets will sit with the person as trustee of the trust. While the personal legally owns the assets, they must hold the assets for the benefit of the beneficiaries. If there are multiple trustees, each trustee must play an active role in managing the trust and comply with their duties.
The main advantages of an individual trustee are that the set up and management costs are low, and it is relatively easy to set up. As there is no company to incorporate, the individual just needs to sign the trust deed and consent to act as trustee and take responsibility for managing the trust. They will then perform the role of trustee by making distributions under the trust.
However, there are some disadvantages to having an individual trustee. The individual trustee could be responsible for any legal issues with the trust. It may also be difficult to distinguish between the trust’s assets and the trustee’s personal assets. Finally, the trust’s assets will have to be transferred to another entity if the individual trustee dies. Transferring a trust requires several documents and can result in significant administrative challenges.
When a company acts as a trustee of a trust, it is a corporate trustee. The company is registered like any other company, but it is often incorporated with the sole purpose of acting as trustee. Meaning, it doesn’t conduct business other than administering the trust. The corporate trustee has shareholders and directors. Therefore, the directors of the corporate trustee control the trustee (i.e., the company) and control the distributions.
Pros and Cons of a Corporate Trustee
There are several benefits of having a corporate trustee. Some of these include:
- Easier separation of trust assets and personal assets as they are held in different names
- Limited liability for individuals, as the company is a separate legal entity
- Greater asset protections
- Simpler succession and control of the trust in the event of death
Disadvantages of a corporate trustee include:
- Additional set up costs
- Maintenance of records for the entity
While it is possible to use an existing company, it is not usually recommended. Registering a new company means its sole purpose is acting as trustee and there have been no activities undertaken which may affect the company or present as conflicts to the trust. While there are some additional costs to set up a trust with a corporate trustee, the benefits often outweigh the disadvantages.
Choosing a Trustee with an Estate Planner in Northern Virginia
If you have decided to set up a trust, you will need to choose a trustee. This can be a difficult choice, but it is important as it can have significant impacts. Therefore, we recommend working with an estate planner in Northern Virginia. Contact Argent Bridge Advisors today to get started!