Passing Along Property thru Trusts

The Tulloch brothers -- One day will run the Darnell L Williams Foundation

I am not a lawyer but I have 6 college credits in trust law. I still remember the words of my professor at Robert Morris University in 1975. He said, “Darnell, we have to follow the law in this country but remember, possession is nine tenths of the law. If you have it or control it, it is up to the other person to take it away from you. ” I never forgot these words and over the years, it saved me a lot of money. So when I bought something, most of the time, (when I was not acting out of stupid love impulses) I kept that real or personal property in my name. Over the years, you would be surprised how many lawyers (working for me or against me) tried to trick me out of my stuff.

While my children were growing up, I set up trust for them to save for college, their college living expenses, and many other things. My oldest daughter used her money to go to college. She used the remainder of her trust money with her husband to buy their first home. I put this money away for her when she was 6 months old. By using trust, x-wives (x-husbands if you had them) or others could not get at the money. The tax man could not touch the money in most cases either. After I die, my foundation which is another form of trust will pass upon my death to my descendents without probate of my Will.

A trust can be as complicated as a Corporate Structure. It can also be as simple as a title on a savings account. Many people don’t understand the principle behind a trust because they don’t understand the concept of owning property. Keep in mind, the United States was created using English Law.

The “trust law” developed in England at the time of the Crusades, during the 12th and 13th centuries.

At the time, land ownership in England was based on the feudal system. When a landowner left England to fight in the Crusades, he needed someone to run his estate in his absence, often to pay and receive feudal dues. To achieve this, he would convey ownership of his lands to an acquaintance, on the understanding that the ownership would be conveyed back on his return. However, Crusaders would often return to find the legal owners' refusal to hand over the property.

Unfortunately for the Crusader, English law did not recognize his claim. As far as the courts were concerned, the land belonged to the trustee, who was under no obligation to return it. The Crusader had no legal claim. The disgruntled Crusader would then petition the king, who would refer the matter to his Lord Chancellor. The Lord Chancellor could do what was "just" and "equitable", and had the power to decide a case according to his conscience. At this time, the principle of equity was born.

The Lord Chancellor would consider it unjust that the legal owner could deny the claims of the Crusader (the "true" owner). Therefore, he would find in favor of the returning Crusader. Over time, it became known that the Lord Chancellor's court (the Court of Chancery) would continually recognize the claim of a returning Crusader. The legal owner would hold the land for the benefit of the original owner, and would be compelled to convey it back to him when requested. The Crusader was the "beneficiary" and the friend the "trustee". The term use of land was coined, and in time developed into what we now know as a trust.

Property of any sort may be held on trust, but growth assets are more commonly placed into trust (for tax and estate planning benefits). My children’s college money was held in trust from birth to the time they had to use it. The uses of trusts are many and varied. Trusts may be created during a person's life (usually by a trust instrument like with my children) or after death in a will. One of the most significant aspects of trusts is the ability to partition and shield assets from the trustee, multiple beneficiaries, and their respective creditors (particularly the trustee's creditors), making it "bankruptcy remote", and leading to its use in pensions, mutual funds, and asset securitization.

Trusts may be created by the expressed intentions of a “person (settlor) passing assets to another person” called an express trusts or they may be created by operation of law (resulting trusts).

Typically a trust is created by one of the following:

a written trust document created by the settlor and signed by both the settlor and the trustees (often referred to as an inter vivos or "living trust");
an oral declaration;
the will of a decedent, usually called a testamentary trust; or
a court order (for example in family proceedings).
In some jurisdictions certain types of assets may not be the subject of a trust without a written document.

Common purposes for trusts include:

Privacy. Trusts may be created purely for privacy. The terms of a will are public and the terms of a trust are not. In some families this alone makes use of trusts ideal.
Spendthrift Protection. A spendthrift clause in a trust prohibits transfers of a beneficiary's interest in the trust. In some jurisdictions, all income interests are automatically given limited spendthrift protection meaning that they cannot be transferred by a beneficiary or reached by his creditors unless a provision is inserted in the trust document allowing such transfers. If there is no provision allowing the beneficiary to transfer his interest, it can be reached by a creditor that furnished necessities such as;

(A) food, clothing, shelter, or medicine;

(B) in suits to enforce child support or alimony; to collect a federal tax lien;

(C) to the extent of income beyond that reasonably needed by the beneficiary for support and education;

(D) and by creditors who have a judgment against the beneficiary who can levy upon 10 percent of the income due.

There is no spendthrift protection where the trustor is also the beneficiary.

Wills and Estate Planning. Trusts frequently appear in wills (indeed, technically, the administration of every deceased's estate is a form of trust). A fairly conventional will, even for a comparatively poor person, often leaves assets to the deceased's spouse (if any), and then to the children equally. If the children are under 18, or under some other age mentioned in the will (21 and 25 are common), a trust must come into existence until the contingency age is reached. The executor of the will is (usually) the trustee, and the children are the beneficiaries. The trustee will have powers to assist the beneficiaries during their minority.

Charities. In some common law jurisdictions all charities must take the form of trusts. In others, corporations may be charities also, but even there a trust is the most usual form for a charity to take. In most jurisdictions, charities are tightly regulated for the public benefit (in England, for example, by the Charity Commission).

Unit Trusts. The trust has proved to be such a flexible concept that it has proved capable of working as an investment vehicle. We talked about the unit trust in previous blogs.

Pension Plans. Pension plans are typically set up as a trust, with the employer as settlor, and the employees and their dependents as beneficiaries.

Remuneration Trusts. Trusts for the benefit of directors, companies, or employee families and dependents.

Corporate Structures. Complex business arrangements, most often in the finance and insurance sectors, sometimes use trusts among various other entities (e.g. corporations) in their structure.

Asset Protection. The principle of "asset protection" is for a person to divorce himself or herself personally from the assets he or she would otherwise own, with the intention that future creditors will not be able to attack that money, even though they may be able to bankrupt him or her personally. One method of asset protection is the creation of a discretionary trust, of which the settlor may be the protector and a beneficiary, but not the trustee and not the sole beneficiary. In such an arrangement the settlor may be in a position to benefit from the trust assets, without owning them, and therefore without them being available to his creditors. Such a trust will usually preserve anonymity with a completely unconnected name (e.g. "The Teddy Bear Trust"). The above is a considerable simplification of the scope of asset protection. It is a subject which straddles ethical boundaries. Some asset protection is legal and (arguably) moral, while some asset protection is illegal and/or (arguably) immoral.

Tax Planning. The tax consequences of doing anything using a trust are usually different from the tax consequences of achieving the same effect by another route (if, indeed, it would be possible to do so). In many cases the tax consequences of using the trust are better than the alternative, and trusts are therefore frequently used for legal tax avoidance. For example, I accumulated thousands of dollars over 20 to 25 years with the tax penalty going to the children instead of to me. Since they had no income most of the time, taxes were greatly diminished.

Tax Evasion. In contrast to tax avoidance, tax evasion is the illegal concealment of income from the tax authorities. Trusts have proved a useful vehicle to the tax evader, as they tend to preserve anonymity, and they divorce the settlor and individual beneficiaries from ownership of the assets. This use is particularly common across borders—a trustee in one country is not necessarily bound to report income to the tax authorities of another. This issue has been addressed by various initiatives of the OECD.

Money Laundering. The same attributes of trusts which attract legitimate asset protectors also attract money launderers. Many of the techniques of asset protection, particularly layering, are techniques of money-laundering also, and innocent trustees such as bank trust companies can become involved in money-laundering in the belief that they are furthering a legitimate asset protection exercise, often without raising suspicion. Co-ownership. Ownership of property by more than one person is facilitated by a trust. In particular, ownership of a matrimonial home is commonly affected by a trust with both partners as beneficiaries and one, or both, owning the legal title as trustee. Same goes for bank and brokerage accounts held in joint name.