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Who and what is in play in a trust? II

Trusts were the topic of the first post of this two-part series. While many of our posts in our Pennsylvania Probate and Estate Administration Blog talk about unique circumstances, individual situations and specific kinds of trusts. This series instead looks at trusts at a broad level. The first part focused on the parties in play in a trust arrangement. This post looks at some of the most basic structures for a trust.

On the broadest level, there are two types of trusts: revocable and irrevocable. A revocable trust in one in which the trustor retains the control or the authority to alter the terms of the trust. On the other side is an irrevocable trust. This is one in which the legal title to the property has been definitively transferred. The beneficiary in this instance has to grant approval for the termination of an irrevocable trust.

One way in which it matters whether a trust is revocable or irrevocable is for tax purposes. When a grantor retains control over the authority to change the terms of a trust, including termination of the arrangement, how much interest does a beneficiary really own? Although the legal title of the property is in the trust, the Internal Revenue Service will look at the level of control over the property in terms of estate taxes and even income tax.

Also important to note in a trust is that there can be different types of interests in a trust. For example, think of an arrangement in which there is an “A” beneficiary and a “B” beneficiary. “A” may have a lifetime interest in the income that is generated by property but not the property itself. This may include something like the rent from a residential property. “B” may then have an ownership interest in the property itself with limitations that run until “A” dies. Either A or B could raise an issue if they think that the property is being mismanaged in any way by the trustee.

If this is a lot of information, it isn’t even scratching the surface of the possibilities of how a trust can be structured and administered. It certainly is no surprise that an estate administration attorney is the right one to talk to when trust issues arise.

Source: examiner.com, "Trusts," Craig Smalley, April 19, 2013

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