What is a Trust in New York City

A trust is a legal arrangement where one party called the grantor transfers property to another person called the trustee, who then holds and manages the trust property for the benefit of the beneficiaries.

There are five key components of a trust: the grantor, the trustee, the beneficiary, the trust property, and the trust document.

The grantor is the person who establishes the trust. He is the person who transfers property to the trust. The grantor’s intentions and directions on how the trust property should be administered is outlined in the trust agreement.

The trustee is the person appointed by the grantor to manage the trust. The grantor transfers his property to the trustee, who then manages it for the benefit of the grantor’s designated beneficiaries. To distinguish the trustee’s personal property from trust property, property transferred to a trustee is denominated in the trustee’s name as trustee. For example, when the grantor transfers trust property to the trustee as part of XYZ trust, the legal owner of the trust property is “Name of Trustee, as Trustee of the XYZ Trust.” The grantor can name successor trustees or provide for a method in selecting successor trustees, in case the trustee resigns, dies, or is incapacitated to serve as trustees.

The beneficiaries are the persons designated by the grantor to benefit from the management of the trust property. There are different types of beneficiaries, including but not limited to income beneficiaries, lifetime beneficiaries, and remainder beneficiaries. The grantor also designates successor beneficiaries who stand to receive the benefits of the trust when the current beneficiaries die.

The trust document outlines the terms of the trust. It reflects the grantor’s intentions and directions on how the trust should be administered. It is the document that guides the trustee’s actions. The provisions in the trust document will depend on the objectives of the grantor in establishing the trust. It could be revocable or irrevocable.

The trust property is another key component of the trust. A trust must be funded. Without the transfer of trust property to the trustee, the trust is ineffective.

Revocable vs. Irrevocable Trust

Although there are many different types of trusts, the most important distinction between trusts is revocable and irrevocable trusts. A revocable trust is a trust that can be modified, amended, or revoked by the grantor, while an irrevocable trust generally cannot be modified, amended, or revoked.

A revocable trust is generally used to avoid probate and eliminate the need for guardianship proceedings with respect to that particular trust property. The most common revocable trust is the trust where the grantor, trustee, and beneficiary are one and the same person. The trust then designates a successor trustee and successor beneficiaries who succeed when the grantor dies.

An irrevocable trust, on the other hand, has been used for creditor protection and to maintain eligibility for government benefits, such as Medicaid. Although it may appear unfavorable because of its irrevocability, an irrevocable trust reduces one’s assets on paper and thus, has also been used to lower taxes or transfer wealth to the next generation with minimal taxes.

Trusts can be complex legal arrangements. A trust document cannot be DIY-ed. The type of trust to be drafted depends on the grantor’s goals. An estate planning lawyer will be able to help a prospective grantor in determining the type of trust that would achieve the grantor’s objectives. Should you need assistance in establishing a trust, we at the Law Offices of Albert Goodwin are here for you. We have offices in New York City, Brooklyn, NY and Queens, NY. You can call us at 212-233-1233 or send us an email at [email protected].

Specific Types of Trusts and Their Purposes

Beyond the revocable/irrevocable distinction, trusts come in many varieties matched to specific purposes:

Living trusts. Created during the grantor's lifetime, typically as the primary estate planning vehicle. The most common variant is the revocable living trust that becomes irrevocable at the grantor's death.

Testamentary trusts. Created at death through the will. The trust comes into being only when the will is probated, and the trustee is appointed at that time.

Special needs trusts. Designed to provide for a disabled beneficiary without disqualifying them from means-tested government benefits like SSI and Medicaid.

Spendthrift trusts. Contain provisions preventing beneficiaries from assigning their interests and protecting trust assets from beneficiaries' creditors.

Charitable remainder trusts. Provide income to non-charitable beneficiaries for a term of years or for life, with the remainder going to charity. Offer income tax deductions and other benefits.

Charitable lead trusts. The reverse — charity receives income for a term, with the remainder passing to family or other non-charitable beneficiaries.

Grantor retained annuity trusts (GRATs). Allow the grantor to transfer appreciation to beneficiaries while retaining annuity payments. Used for tax-efficient wealth transfer.

Qualified personal residence trusts (QPRTs). Allow the grantor to transfer a residence while retaining the right to live there for a term of years.

Life insurance trusts (ILITs). Hold life insurance policies outside the insured's estate to avoid estate tax on the proceeds.

Generation-skipping trusts. Designed to benefit grandchildren or more distant descendants, with attention to the generation-skipping transfer tax.

Funding the Trust

A trust without assets is just a piece of paper. Funding the trust is essential to its effectiveness:

• Real estate. Deeds the property from the grantor individually to the grantor as trustee (or to a different trustee).
• Bank accounts. Changes account ownership to the trust or names the trust as payable-on-death beneficiary.
• Brokerage accounts. Similar to bank accounts — either retitle or designate.
• Retirement accounts. Generally not retitled directly (would trigger immediate taxation), but beneficiary designations can name the trust.
• Life insurance. Either transferred to the trust or with the trust named as beneficiary.
• Business interests. Assignment documents transferring ownership.
• Tangible personal property. A general assignment can transfer all tangible personal property.

Failure to fund the trust is a common estate planning mistake. The grantor pays for a beautiful trust document and then never gets around to transferring assets, defeating the purpose of the trust.

Tax Treatment of Trusts

Trusts have specific tax characteristics:

Income tax. Trusts file Form 1041 federally and Form IT-205 in New York. Income retained at the trust level is taxed at compressed trust rates that reach the top bracket quickly. Income distributed to beneficiaries is generally taxed to the beneficiaries through K-1 forms.

Estate tax. Assets in revocable trusts are included in the grantor's estate for estate tax purposes. Assets in irrevocable trusts are generally not included if the trust is properly structured.

Gift tax. Transfers to irrevocable trusts are generally completed gifts subject to gift tax rules. Annual exclusions and lifetime exemptions apply.

Generation-skipping transfer tax. Transfers to grandchildren or more distant descendants may trigger GST tax in addition to gift or estate tax.

Property tax. Real estate transferred to a trust generally does not trigger property tax reassessment in New York.

Trustee Selection

Choosing the right trustee is one of the most consequential decisions in trust planning:

• Family member trustees. Often know the family situation but may face conflicts and lack professional expertise.
• Professional individual trustees. Attorneys, CPAs, or other professionals can serve as trustees, bringing expertise but adding cost.
• Corporate trustees. Banks, trust companies, and other institutions provide stability and continuity but at higher fees.
• Co-trustees. Combinations (family member + corporate trustee, family member + professional) can balance the considerations.
• Trust protectors. Some trusts include a trust protector with limited powers (e.g., to remove and replace trustees) as a check on trustee behavior.

The right choice depends on the trust's purpose, duration, asset complexity, beneficiary situation, and family dynamics.

Trustee Duties and Liabilities

Trustees owe beneficiaries multiple fiduciary duties:

• Duty of loyalty. Acting solely in the beneficiaries' interests.
• Duty of prudence. Managing trust assets with reasonable care, skill, and caution.
• Duty of impartiality. Treating similarly situated beneficiaries equally.
• Duty to inform. Keeping beneficiaries reasonably informed about trust matters.
• Duty to account. Providing periodic accountings of trust activity.
• Duty to administer. Following the trust's terms and managing assets actively.
• Duty to invest. Following the prudent investor standard for trust investments.

Violations of these duties create personal liability for the trustee. Trustees can be surcharged for losses caused by breach and removed for serious misconduct.

Trust Termination

Trusts terminate in various ways:

• By their terms. The trust document specifies when the trust ends (a specific date, a beneficiary reaching a specific age, exhaustion of trust property).
• By revocation. Revocable trusts can be revoked by the grantor at any time during their life.
• By exhaustion. When trust assets are completely distributed.
• By merger. When the beneficial and legal interests merge in one person.
• By court order. The court can terminate a trust when its purpose has been fulfilled, become impossible, or otherwise warrant termination.
• By beneficiary consent. With certain procedural requirements, beneficiaries can sometimes consent to early termination.

On termination, the trustee distributes remaining assets according to the trust's terms and files final tax returns. The trust ceases to exist as a separate legal entity.