December 22, 2023 | 3 MIN READ

Trust Fundamentals
At a Glance

Protecting your wealth and ensuring your assets are passed on to your chosen beneficiaries under your specific conditions is top-of-mind for many individuals and families. Trusts can be a powerful legal instrument to help provide you with control, reduce risks to wealth, mitigate taxes and maintain confidentiality.

What Is a Trust?

At its core, a trust represents a legal relationship in which an asset owner (the grantor) transfers assets such as stocks, bonds, cash, real estate, artwork, or insurance policies to another party (the trustee). The trustee administers these assets for the benefit of a person or organization (the beneficiary). Individuals create trusts for various reasons, but the primary goals often revolve around asset protection, reducing tax liabilities and ensuring the orderly distribution of assets.

Trusts can be beneficial in:

  • Managing and safeguarding assets
  • Specifying how and when assets are distributed
  • Potentially bypassing the costs and delays of probate
  • Enhancing confidentiality in managing affairs
  • Potentially reducing estate, gift and generation-skipping transfer taxes
  • Supporting charitable causes or establishing a private foundation

Basic Categories of Trusts

Revocable Trusts

A revocable trust is established while the grantor is alive. It allows the grantor to maintain control over the trust, change its terms, or terminate it. Additionally, it can serve to protect and manage assets in the event of the grantor’s incapacitation and may help avoid the probate process.

Irrevocable Trusts

An irrevocable trust can be created during life or at death and is typically unchangeable once established. It is often motivated by the desire to mitigate transfer taxes, such as estate, gift, or generation-skipping transfer taxes. Examples of irrevocable trusts include:

  • Credit Shelter Trusts: These trusts aim to shield assets from federal estate taxes and are commonly set up for beneficiaries, such as children and surviving spouses. They may grant the surviving spouse the authority to manage trust investments and receive income.
  • Irrevocable Life Insurance Trusts (ILIT): ILITs serve to exclude life insurance proceeds from the grantor’s taxable estate, effectively reducing estate tax liability. The trust can provide income and principal to heirs, ensuring the availability of funds to cover estate taxes and other expenses.
  • Charitable Remainder Trusts (CRT): Ideal for those with an interest in charitable giving while preserving income for themselves or family members. In a CRT, the grantor places highly appreciated, low-cost basis assets into the trust, which can then be sold, often without incurring capital gains tax. The grantor receives an annuity or a percentage of the trust’s assets, which can be set up for life or a specified period. After the grantor’s death or the specified period, the remaining assets pass to charity.
  • Charitable Lead Trusts (CLT): CLTs are established with assets placed in the trust. A named charity receives an annuity or a percentage of the trust’s assets over the life of the grantor or a specified period. At the end of the stipulated period, the remaining assets are transferred to beneficiaries, typically children, without additional gift or estate taxes.
  • Grantor Retained Annuity Trust (GRAT): GRATs provide a method to pass highly appreciated assets to family members at discounted levels. The grantor receives an annuity paid by the trust over a specific time period. At the end of the period, any property remaining in the trust generally passes to the children without incurring estate or gift taxes.
  • Dynasty Trusts: Dynasty Trusts aim to provide a legacy for multiple generations while utilizing the grantor’s exemption from the generation-skipping transfer tax. They can be funded with various assets and grow substantially over extended periods.

Testamentary Trusts

These trusts come into existence upon your death and operate similarly to other trusts. The trust document dictates how trust assets are managed and distributed to beneficiaries.

Understanding the Basics

Trusts continue to play a crucial role in wealth transfer as individuals and families plan to pass assets to the next generation. By understanding these fundamentals, you’ll be better equipped to align your wishes with trust services.

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.