What Is a Trust?

The information below is from the Oregon State Bar's Tel-law service, a collection of recorded legal information messages prepared by the lawyers of Oregon. In addition to being online, the Tel-law service is accessible by telephone at 503-620-3000 or toll-free in Oregon only, 1-800-452-4776. A touch tone phone allows direct access 24 hours a day, 7 days a week. To receive a free Tel-law brochure listing the subjects available call 503-620-0222, ext. 0.

The following information regarding trusts is brought to you as a public service by the lawyers of the State of Oregon. The material presented is general legal information intended to alert you to possible legal problems and solutions.

In simple terms, a trust is a relationship in which a person, called a trustor, transfers something of value, called an asset, to another person, called a trustee. The trustee then manages and controls this asset for the benefit of a third person, called a beneficiary. An asset is any kind of property.

What are the uses of a trust? Trusts have several uses and they can be of much benefit when properly set up and managed. One of the uses of a trust is to provide flexible control of assets for the benefit of minor children. A trust set up for the benefit of minor children can avoid the necessity of further legal proceedings, such as the appointment of a conservator. A conservator is someone who is appointed by the court to control the assets of minor children. Conservators are restricted by law and must be bonded and file annual accountings with the probate court.

Children cannot legally handle their own financial affairs before they reach the age of 18 in Oregon, 21 in other states. One purpose of creating a trust for a child is to assure the trustor that the child will be benefited but will not have control of the trust assets until the child is older. In establishing a trust, the trustor selects a trustee and specifically instructs the trustee how the assets will be used for the beneficiary. A trust for the benefit of minors often takes effect when both parents have died. It is usually set up to provide for the support, care and education of the children until they have reached the age set by their parents to actually receive the assets being held by the trustee.

Another use of a trust, known as a "revocable living trust", is as an alternative to a will. This type of trust is revocable and amendable meaning it can be terminated or changed by the trustor anytime during the trustor's life. It may not be changed after the trustor's death. Like a will, a revocable living trust gives instructions as to how the trustor's assets are to be distributed at the trustor's death. It also has additional characteristics. For example, revocable living trusts can avoid the need to probate an estate after the trustor's death. Additionally, a trustor can choose to manage the trust assets or can name someone else to. The trustor can even decide to manage the trust assets unless and until the trustor becomes incapacitated at which time a person the trustor names in the trust takes over management of the trust assets. In the right set of circumstances revocable living trusts may be more desirable than a will, but they are not the right choice for all people in all situations. One common misconception is that revocable living trust save death taxes. This is not true. The assets of a revocable living trust are subject to federal and state death taxes in exactly the same way as are the assets passing under the terms of a will. You should discuss your unique circumstance with an attorney competent in estate planning to see if a revocable living trust is a good choice for you

Trusts can also be irrevocable meaning that they cannot be changed or terminated, even during the life of the trustor. A major characteristic of irrevocable trust is that the trust assets are placed out of the trustor's control. Some types of irrevocable trusts may reduce death taxes, and, in some cases, can save income taxes. Consider the example of the person who is supporting an aged relative. The aged relative has a low income and thus a lower income tax. By placing an income-earning asset in an irrevocable trust and paying the income to the relative, the trust will reduce the overall income tax of the trustor but will, at the same time, provide the same amount of support. Shifting income to the trustor's own children has become more difficult because of the new "kiddie" tax rules. You should consult your attorney or tax advisor.

Often on the death of one spouse, a trust is created to provide for the surviving spouse. Such a trust can be created under the terms of a revocable living trust or a will. Either way, the tax consequences are not affected. In larger estates, the use of a trust can postpone and reduce death taxes, and, at the same time, allow the survivor to have the benefit of the support for life from the trust assets. At the death of the surviving spouse, the assets may then be distributed to the other named beneficiaries after taxes, if any, are paid. Under existing law, for the year 2004, a couple with total combined assets approaching, or in excess of, $850,000 would be wise to consult with an attorney competent in estate planning to discuss whether a trust may be desirable to reduce, or postpone, death taxes. Likewise, it would be prudent for a single person with assets approaching, or in excess of, $850,000 to seek a consultation. Many people are aware that if a person dies in 2004 with less than 1.5 million dollars in assets that no federal death tax will be due. Fewer people are aware, however, that if a person dies in 2004 with more than $850,000 in assets, even though no federal death tax will be due, an Oregon death tax will be due.

Trusts can be established during one's lifetime ("Living Trust"), or in a will to be created upon death. In either event, the tax benefits can be identical. Trusts are complex legal documents and not appropriate in all situations. Before establishing a trust you should seek legal advice. If you have questions, or need more information about trusts, contact an attorney who is knowledgeable on trust and estate planning matters.

Although Tel-Law information is periodically reviewed, it is important for you to realize that changes may occur in this area of law.

This information is not intended to be legal advice regarding your particular problem, and it is not intended to replace the work of an attorney.