Trust Glossary

Based upon Title 12 of the Delaware Code, Section 3570, et al., an asset protection trust is an irrevocable trust that is not subject to certain of the settlor’s creditors even though the settlor is a beneficiary of the trust. These trusts must meet certain minimum criteria, such as they must be irrevocable, contain a spendthrift clause, have a trustee resident in the state of administration who is materially participating in the trust’s administration, and apply the law of that same state to its administration. These trusts are often used as vehicles to mitigate the effects of taxation, divorce from a future spouse, bankruptcy, and future litigation.

Trusts established by a banking institution which owns life insurance on the lives of its employees, with benefits payable to the bank. These trusts are used to hedge the financial costs of losing key employees to unexpected death, the risk of recruiting and training replacements of necessary or highly-trained personnel, or to fund corporate obligations to redeem stock upon the death of an owner.

Trusts that freeze the value of assets for gift and estate tax purposes when such assets are sold to the trust by a beneficiary (“beneficiary-seller”), who has the added benefit of being eligible to receive future discretionary distributions from the trust. Other benefits of a BDIT are that the beneficiary-seller will enjoy asset protection with respect to the assets in the trust, and perhaps even leverage the value of assets for gift and estate tax purposes, while having no impact on the beneficiary-seller’s unified credit.

A charitable trust is an irrevocable trust established for a charitable purpose as defined by the Internal Revenue Code. These trusts are established to provide an income stream to the income beneficiary while preserving the principal as a remainder interest. These trusts can be set up either as a charitable lead trust or a charitable remainder trust, dependent upon which portion of the interest is being given to the charitable beneficiary and which is being kept for the family members. Normally, the donor is able to claim a charitable income tax deduction relevant to the gift.

A dynasty trust is a trust intended to benefit numerous generations over a very extended duration. In some states like Delaware, where the Rule Against Perpetuities has been repealed, their assets are able to stay in trust in perpetuity. Typically, these trusts are established to preserve family values, provide asset protection for beneficiaries, protect assets from estate and generation-skipping tax, and create an on-going resource for family members from generation to generation.

Pursuant to Section 3313 of Title 12 of the Delaware Code, a trust may be established with a complete bifurcation of trustee duties. The trust document may grant distribution authority and/or investment authority to someone other than the trustee. Any action taken by a trustee at the direction of an adviser (or committee of advisers) will limit the trustee’s liability as to that action. The adviser, as a co-fiduciary, has his or her own relationship with the beneficiaries and is able to act in his or her sole discretion. This structure allows a Delaware trustee to be solely an administrative trustee and thus limit its duties and allow other Advisers to the family to take on responsibilities historically available only to trustees.

A Delaware incomplete non-grantor trust is a trust that takes advantage of a unique opportunity to minimize, and often even eliminate, state income tax under Delaware law. A DING trust takes advantage of Delaware’s favorable rules which permit a deduction for the tax caused by the accumulation of income within the trust for non-resident beneficiaries and does not tax retained capital gains realized upon the sale of trust assets. This type of trust is very useful in planning for the future sale of your closely held business. In addition, the incomplete nature of the gift means that the initial contribution to the trust will not be subject to federal transfer tax.

Foreign trusts are trusts which fall within the parameters of IRC Section 7701(a)(31)(B). This means that (1) a U.S. court does not exercise primary jurisdiction over the administration of the trust and (2) a U.S. person does not control all substantial trust decisions. Typically, these trusts are set up as grantor trusts for tax planning purposes and are not subject to U.S. income tax unless they are invested in assets with U.S. source income (with the exception of certain types of cash accounts which are exempt from taxation). To be a grantor trust, the trusts are permitted to make distributions only to the grantor and/or the grantor’s spouse during their lifetimes.

Often set up as an annuity trust, these trusts allow a grantor to establish a trust, retain a right to receive periodic distributions for a predetermined period of time, and then leave the remainder interest in the trust to future generations transfer tax free, if properly structured.

A life insurance trust is a trust that holds a life insurance policy or policies. If the trust is irrevocable and properly structured, the proceeds of the policy will not be includable in the insured’s taxable estate. Upon the death of the insured, the trustee is to receive the proceeds of the life insurance policy the trust can (1) continue to be administered pursuant to its terms for a predetermined class of beneficiaries or (2) provide liquidity for the decedent’s estate by exchanging its liquid assets for non-liquid assets held by the estate.

A self-settled trust, or trust created by an individual who is also a beneficiary of the trust, can be used for more than asset protection. These trusts can also be used for foreign trust planning, pre-immigration planning, and pre-marital planning. In the pre-immigration arena, an individual who is planning to move to the United States can set up a trust and make unlimited gifts to the same without incurring any U.S. transfer tax consequences. After immigration, the grantor can remain a beneficiary of the trust, able to receive distributions pursuant to the terms of the trust, typically at the discretion of an independent trustee.

A purpose trust is a trust established for a non-charitable purpose, such as to benefit specific family pets, maintain a cemetery, maintain an art collection or antiques, or maintain a family vacation home. In addition to these uses, many are now utilizing the purpose trust in complex foreign trust planning to minimize the effects of burdensome tax regimes in foreign jurisdictions.

A revocable trust is a trust established by the settlor, who under the terms of the trust retains the right to revoke the trust. These trusts are used quite often as a will substitute or as a means of trust planning for foreign persons.

As defined below, a Delaware statutory trust is an unincorporated business association created by the execution of a governing instrument, in this case a trust agreement, and the filing of a certificate of trust filed with the Delaware Secretary of State. While these trusts can be used for business purposes, they may be used for personal trust planning.

The trust agreement is entered into between one or more trustees and one or more persons who are to own beneficial interests in the Delaware Statutory Trust. The trustee must be either:

A natural person who is a resident of Delaware, or a partnership, limited partnership, trust, estate, association, corporation or other entity that has its main place of business in Delaware. It may consist of more than one agreement; there could be the trust agreement, and one or more additional operative agreements that establish the rights and powers of the Delaware business trust, the trustee(s) and beneficial owners.

Delaware law permits maximum flexibility when establishing a trust, with the potential of having several critical functions performed by nonresidents of the State of Delaware. These are the Investment Adviser, the Trust Protector, and the Distribution Adviser.

The investment adviser is the individual or entity named in the trust document to manage the trust assets and must follow the guidelines established by the grantor in the trust document. Anyone can be named in this capacity; however, it is most common to name a trusted friend, relative, or existing financial adviser. We require an investment adviser for all of your trusts.

The trust protector is the individual named in the trust agreement with the power to act as watchdog to monitor the actions and services of the trustee. In some cases, the grantor is named as the protector, but a spouse or family member is most common. The protector usually is empowered to remove the trustee, change trust jurisdiction, and can veto trustee decisions.

Again, this important function can be performed by anyone, even a nonresident of the State of Delaware. Normally the grantor selects an individual who has a close relationship with the grantor’s family since this adviser will direct the trustee to make distributions to the beneficiaries. The amount, timing, and needs of the beneficiaries will be best determined by someone familiar with the grantor’s family.

The degree commonly conferred by law schools upon successful completion of the required number of class hours.

An advanced degree that is awarded to an individual who already holds a J.D. upon successful completion of class hours in a particular specialty, such as taxation.

A designation awarded to members of the Society of Trust and Estate Practitioner, a professional body providing its members with local, national and international learning and business networking, focusing on the responsible stewardship of assets today and across generations. TEPs are the most experienced and senior practitioners in the field of trusts and estates.

A designation awarded to members of the International Business Brokers Association, indicating a professional and experienced business counselor.

A professional credential offered by the American Bankers’ Association for financial professionals indicating training and knowledge in taxes, investments, financial planning, trusts and estates.

An American tax expert federally licensed to represent clients before the Internal Revenue Service.

A professional who has passed the uniform CPA examination administered by the AICPA and who has received state certification to practice accounting. To obtain this designation, an individual typically must complete 5 years of education and a designated period of work experience.

A graduate level degree achieved at a university or college that provides theoretical and practical training to help graduates gain a better understanding of general business management functions which may have a specific focus such as accounting, finance or marketing.

An academic degree for which a university has waived the usual requirements, such as matriculation, residence, study and the passing of examinations. The degree is conferred as a way of honoring a distinguished visitor’s contribution to a specific field or to society in general.