Trust Fundamentals
At a Glance

You want to protect your wealth and have your assets passed on to whom you choose under the conditions you specify.

A trust can help give you this control and may guard against disputes, minimize your taxes and protect your privacy.

What Is a Trust?

At its core a trust is simply a legal relationship in which an owner (grantor) transfers assets such as stocks, bonds, cash, real estate, artwork or insurance policies to another party (trustee) for the benefit of a person or organization (beneficiary).

The reasons people create trusts are, of course, as myriad and complicated as life itself. But at their root, the goals of most trusts are related to asset protection, minimization of tax liability and the orderly disposition of assets.

Trusts are often helpful in:

  • Managing and protecting assets
  • Providing for how and when your assets are distributed
  • Avoiding many of the costs and delays of probate
  • Increasing privacy and confidentiality in how your affairs are handled
  • Reducing estate, gift and generation-skipping transfer taxes
  • Providing for a charity or private foundation

Basic Categories of Trusts

Revocable Trusts

Every trust is either revocable or irrevocable — it can either be undone or it cannot. A revocable trust is created while you, the grantor, is alive. It allows you to maintain control and change or terminate the trust. It may also be used to help protect and manage assets if you become incapacitated and it may avoid probate — the legal process of settling an estate.

Irrevocable Trusts

An irrevocable trust can be created during life or at death, and typically cannot be changed once it has been established. It is usually motivated by the desire to minimize transfer tax (estate, gift or generation-skipping transfer tax). Examples of trusts that can be irrevocable include credit shelter trusts, irrevocable life insurance trusts, charitable remainder trusts, charitable lead trusts, grantor retained annuity trusts and dynasty trusts.

A credit shelter trust may protect assets from federal estate taxes for beneficiaries, typically children and the surviving spouse. Moreover, it may allow the surviving spouse to manage the trust investments and receive income (and possibly principal) from the trust. It is typically funded at the death of the first spouse utilizing the applicable federal exclusion amount, which is the amount that can pass free from the federal estate tax. An irrevocable life insurance trust (ILIT) allows for life insurance proceeds to be excluded from the grantor’s taxable estate, thus eliminating estate tax liability on those assets. The ILIT can provide income and/or principal to heirs and provides family members with funds to pay estate taxes and other expenses.

A charitable remainder trust (CRT) can be a useful tool when you are interested in charitable giving, but are concerned with over-committing at the expense of your lifestyle or family. In a CRT you, the grantor, place assets in the trust (usually these are highly appreciated, low cost basis assets), which the trust can then sell. Neither you nor the trust incurs any capital gains tax. You then receive an annuity or percentage of the trust’s assets (an arrangement that can be set up for life, or for a specified period of time). After your death or the specified period, the remainder passes to charity.

In a charitable lead trust (CLT), assets are placed in the trust and a named charity receives an annuity or a percentage of the trust’s assets over the life of the grantor or a specified period of time. At the end of the time period the remaining assets are transferred to beneficiaries (typically children) free of any additional gift or estate taxes.

A grantor retained annuity trust (GRAT) provides a way to pass highly appreciated assets to family members at discounted levels. In a GRAT you, as the grantor, receive an annuity paid by the trust over a specific time period. And at the end of the period, any property remaining in the trust is passed to the children free of estate or gift taxes.

A dynasty trust can provide a legacy for multiple generations by utilizing your exemption from the generation-skipping transfer tax. Dynasty trusts are funded with various assets and can grow to very substantial sums over long periods of time.

Testamentary Trusts

A testamentary trust does not come into existence until your death. At that time, the testamentary trust works like other trusts, with the document controlling how trust assets are managed and distributed to beneficiaries.

Understanding the Basics

However individuals raise the issue, and by whatever name the appropriate legal structure may be called, trusts will continue to grow in importance as preparations are made to pass today’s wealth on to the next generation. By knowing the basics, you will be in a better position to connect your wishes with our capabilities in trust.

Before implementing a wealth plan, you will want to consult your independent legal and tax advisors in the relevant jurisdictions regarding the appropriate strategy to achieve your objectives. For more information about our trust and wealth planning services, please have your Citi Personal Wealth Management Wealth Advisor reach out to one of our Wealth Planning Specialists.