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Louisiana law defines a trust as “the relationship resulting from the transfer of title to property to a person to be administered by him as a fiduciary for the benefit of another.” R.S. § 9:1731. This definition, although not expressly, describes the three parties that are necessary for the creation of a trust. The first is the “settlor,” who is the creator of the trust and is the one initially funding the trust. The second is the “trustee,” who is the person that holds legal title to the trust property and administers the trust in accordance with the trust instrument for the benefit of the beneficiary(s). The third is the “beneficiary,” who is the person for whose benefit the trust was created by the settlor. These three parties exist for the creation of every trust.
A trust may be inter vivos (created during the settlor’s lifetime) or testamentary (created in a Last Will and Testament). A trust may also be revocable or irrevocable, which depends largely on the goals sought to be accomplished by the settlor. A trust is a tool that estate planners use to help clients achieve a garden variety of goals or address a garden variety of issues. For example, a trust can be beneficial in the following scenarios:
Disabled Child, Grandchild, or Beneficiary: Government benefits such as Medicaid and Supplemental Social Security (SSI) have income and resource requirements for entitlement to those programs. If a child, grandchild, or potential beneficiary with a disability enabling them to receive government benefits will lose those benefits if they receive a gift or inheritance. The solution is to create a Supplemental Needs Trust, or Special Needs Trusts (SNTs), which allow the disabled beneficiary to benefit from the money without disqualifying them from receiving government benefits.
Minor Children: Parents or grandparents who want to gift or leave property to minor children or grandchildren often elect to use a trust that terminates when the child or grandchild has reached a certain age. There are multiple trusts that may be used to accomplish the donor’s goals, and which one is right just depends on the donor’s intentions.
Poor Money Management Beneficiary: There are always those family members who either have poor money management skills or mountains of debt. It can be an unsettling thought for a donor that a gift or inheritance to such a beneficiary will just be squandered. The solution is to create a “Spendthrift Trust,” which is a trust that shields the trust property from most, but not all, creditors and prevents the beneficiary from being able to direct or demand distributions. Thus, a Spendthrift Trust gives some certainty to the donor that the gift or inheritance they leave will not be wasted.
Tax Planning: Tax planning strategies become important when an individual has an estate that exceeds the applicable federal exemption amount that may pass to his/her beneficiaries free of estate tax. The current estate tax exemption amount is $13.61 million/individual. With a maximum federal estate tax rate of 40 percent, it becomes very important to engage in proper planning if the individual’s goal is to pass wealth to beneficiaries with the least amount of estate tax liability. To accomplish that goal, it is necessary to reduce the person’s taxable estate prior to death. This is most often accomplished through the use of various irrevocable inter vivos trusts.
If you would like to discuss whether a trust is right for your estate planning or tax planning goals, please do not hesitate to reach out to our office.