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What Kind Of Assets Can A Trust Own?

A trust can own almost any kind of asset except for retirement plans (which by law have to be owned by the employee-owner directly). For instance, a trust cannot own an IRA or a 401K plan but it can be a beneficiary of either. It can also own life insurance and sometimes that is recommended (although usually not necessary) and it can also be the beneficiary of life insurance. Whether a trust should be the owner of such assets is evaluated as part of the estate planning process.

What Kinds of Transactions Should a Trustee Not Engage In?

Fundamentally a trustee cannot engage in any type of transaction that is not in the best interests of the beneficiary because the trustee is considered a fiduciary to the beneficiary, meaning a person who has a legal responsibility to act only in the beneficiary’s best interests while dealing with the assets.

So a trustee, for instance, cannot, without a court order, purchase an asset of the trust because the trustee would be in a position where he could take advantage of the trust by, for instance, charging himself as the buyer, too little for the asset or agreeing to overly generous payment terms or too low an interest rate on any deferred payments. Otherwise, a trust can engage in any type of transaction that an individual can. The main limitation is that a trustee as a fiduciary cannot engage in any transaction where he has the potential for taking advantage of the trust and therefore act adversely to the best interests of the beneficiary.

How Are Trusts Treated Before and After the Trustor Dies for Tax Purposes?

Trusts that are revocable and amendable during the trustors’ lifetimes are regarded as “grantor trusts” for state and federal tax purposes. Grantor trusts are ignored for tax purposes and the IRS treats them as if they do not exist. They are not required to file a separate tax return, and are not treated as a separate taxable entity. There is no reference to them even in the tax return because the IRS does not really care whether they exist or not.

In most cases, at the death of the second spouse, they may become irrevocable and continue for the benefit of the children or grandchildren. Those trusts do become taxable entities. They are assigned a separate federal tax payer number and are required to file federal and state tax returns as long as they continue to exist as irrevocable trusts. So, the primary distinction is that revocable trusts (for most purposes) are disregarded for tax purposes while irrevocable trusts create a separate taxable entity required to file tax returns and so forth.

Can a Trust Help Plan for Medical Expenses, Disability and End of Life or Funeral Planning?

Yes. A trust can contain provisions to specifically address all of these situations. In a properly drafted trust, the trustee is given sufficient authority to deal with changes during the lifetime of the beneficiary. For instance, if a beneficiary contracts an illness or a disability, the trustee typically has the discretion to deal with those new situations. They also provide for payment of medical expenses at the end of life just like any other expense that comes up and also of course to pay for a beneficiary’s funeral.

Trusts are flexible devices and can be structured so that they are useful over different life situations, not just the situation that exists at the time of creation. We know that people’s circumstances will change and the trustee has to have sufficient flexibility to use the trust funds to pay for those new life situations as they arise.

For more information on Kinds of Assets that Can be Owned by a Trust, a free initial consultation is your next best step. Get the information you’re seeking by calling (916) 635-0302 today.

California’s Estate Planning Essentials