7. Using trusts to transfer assets from an estate

Trusts facilitate the transfer of property (and the income from that property) from an estate to another party.

A trust is a legal relationship created when one party, the , transfers property to a second party, the (which may be an organization or an individual), for the benefit of one or more third parties, the . The property placed in the trust is called the or res (the Latin word for thing or possession).

Trusts are used for various purposes, but the most common reasons for using a trust to transfer assets from an estate are (1) to attain income and estate tax savings and (2) to conserve property over a long period of time.

Consider the following scenarios:

Alison and Amy both created trusts but used different approaches:

Alison

Alison created a trust in which she has the right to change its terms or even to cancel it. When Alison dies, the assets will be considered part of her estate.

What kind of trust did Alison most likely create?

An irrevocable life insurance trust

A testamentary trust

A revocable living trust

An irrevocable living trust

Amy

Amy is a wealthy individual who has created a trust in which the primary asset is life insurance on her life. Amy has named the trustee as the beneficiary of the trust in order to avoid having the proceeds of the insurance policy included in her own estate. The trustee will then use the proceeds to pay for Amys estate taxes and to help take care of her spouse. Eventually, the remainder of the proceeds will be distributed to Amys children.

What kind of trust did Amy most likely create?

A testamentary trust

A revocable living trust

An irrevocable life insurance trust

An irrevocable living trust

Madeline and Eileen both created trusts but used different approaches:

Madeline

Madeline is a successful professional who has three competitive children. To avoid fueling sibling rivalry, Madeline created separate trusts for each child with the same amount of money funding each trust, available on the childs twentyfirst birthday, whether Madeline is dead or alive. Madeline has no power to change the terms of the trusts regardless of how her children conduct their lives.

What kind of trust did Madeline most likely create?

A testamentary trust

An irrevocable living trust

A revocable living trust

An irrevocable life insurance trust

Eileen

Eileen and her husband just retired. They intend to travel frequently and to enjoy their retirement without counting their pennies like they had to for many years. They created trusts for their minor grandchildren, to be funded with any money left over, but not until after they die.

What kind of trust did Eileen most likely create?

A testamentary trust

An irrevocable life insurance trust

An irrevocable living trust

A revocable living trust

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