The diverse, helpful realm of trusts

Trusts are flexible legal agreements recognized in courts and by the Internal Revenue Service for accomplishing a variety of purposes. Trusts may be devised to sequester assets for charitable and other specified purposes.

A tax-saving trust may reduce double taxation of some assets if established by a married couple before the death of either one. A 10-year, short-term trust may provide income to students or to aged relatives during the term after which assets revert to the original owner.

One of the more useful and popular trusts is known as the "living trust," so named because it is established by a person or couple while they are living. These trusts, like all trusts, involve three parties -- the trustor, or person setting up the trust; the beneficiary, or person benefiting from the trust; and the trustee, who manages the trust.

A married couple may wish to turn over the management of their assets to a trustee while they are living for various reasons. The trustee serves at the pleasure of the trustor(s) and may be replaced at any time. In some states one or the other of the couple may serve as trustee. A contingent trustee is named to take over when the original trustee dies.

While the couple lives, the trustee manages the assets and pays out benefits for their living expenses and other needs. After the second death, remaining assets do not go through probate and are not disclosed publicly. A living trust permits the trustor(s) to evaluate the performance of the trustee while he or she is still living and to change trustees if performance is poor. A living trust also avoids the expense of probate and frequently expedites the settlement of an estate. Estate and inheritance taxes are not likely to be affected.

A living trust may also be established by a single person to provide for continuing care in case that person should become physically or mentally incompetent. Couples may adopt a living trust for the same reason. The person establishing the trust (trustor) transfers assets to the trust under the direction of the trustee. The trustor may also be the beneficiary while he or she lives and draw income regularly from assets in the trust. However, if the person is confined to a nursing home or if the person is incompetent, the trustee uses funds from the trust to ensure continuing care. At death the assets are distributed according to trust directions.

Trust expenses are of two kinds -- one- time costs for setting up the trust and a continuing trustee for fee managing the assets. Because of their almost unlimited flexibility, living trusts are tailor-made documents. An attorney should set up the "living trust" and account for the specific wishes of the trustor(s) during the lifetime. A living trust can be more complicated than a will.Origination costs could run several hundred dollars, depending on asset values and complexity.

Trustee management fees will usually run about one-half of 1 percent of the asset value each year. Acting as one's own trustee or having a friend as trustee could avoid the yearly fee. Living trusts are not usually established early in life. There is also the trade-off to consider -- one-time plus several years of fees for a living trust vs. the cost of probate if avoiding probate is a prime objective.

Individuals may be named as trustees, but a bank or trust company should be named as a contingent trustee to ensure continuity after death. A living trust may also delay distribution of assets until certain events occur, such as a young person's reaching majority.

For more information and to establish a trust, visit an attorney.

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