Q: My wife and I own a cattle operation. We would like to know what is involved in setting up a trust for our children after we die.
A: In a trust, property including money is held by one person or company, called the trustee, for the benefit of someone else, called the beneficiary. There can be more than one beneficiary.
For example, Bella owns several apartment blocks and because of health reasons doesn’t want to continue running them, but wants to keep them to provide income for her children. She believes her children are not mature enough to manage the property.
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She can create a trust, wherein the property is transferred to a trustee who holds title to the property and manages it for the benefit of the children.
Income would be paid to the children as directed by the trust document. The document would name the trustee and an alternate if needed, whether the trustee has the power to sell an apartment, what income will be paid to the beneficiaries and when, the trustee’s fee, how long the trust would run and what happens to the property after that.
A trust also arises out of a will. When an individual appoints an executor, upon the first party’s death that appointee becomes the trustee of the property and holds it until such time as the property has been distributed according to the terms of the will.
If there are minor children the executor or trustee might be
instructed to hold the property until the youngest child becomes
a legal adult.
A trust can be used to hold the interests in a family business. So rather than transferring the family business to the siblings, the business or shares in the family company could be held by a trust.
A trust is one method of holding property when family members are either unable or have no desire to run the business but you want the business to continue. However, a trust might not be the right arrangement if one or more children want to run the business. That is because officially the trustee is in charge.
In this case, forming a company might be a better way to transfer it to the children.
While the principle is simple, a trust will involve complex legal and income tax questions. A trust is considered a separate taxpayer and there will be issues of capital gains tax involving any transfer of assets. In some instances there may be tax advantages to having the property held in a trust. I recommend seeking legal and accounting advice as to whether a trust is the best option for you.
Next week: a special kind of trust – the alter ego trust.
Don Purich is a former practising lawyer who is now involved in publishing, teaching and writing about legal issues. His columns are intended as general advice only. Individuals are encouraged to seek other opinions and/or personal counsel when dealing with legal matters.
