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USA Trusts

Most law relating to the administration and regulation of trusts is at State Level. However, in 2004 the National Conference of Commissioners created a uniform statutory code for the fifty states called the Uniform Trust Code in an effort to align common law principles. Twenty five states have since adopted this code albeit most with some minor changes or exceptions.

Trusts are becoming very popular as they can provide asset management for multiple family members over a greater period of time than any other estate planning devices. They can hold various types of assets which can be controlled even in the event of the death of the original owner known as the Settlor. They also have various advantages over wills such as the terms of ones will is public whereas the terms of a trust is private.

Trusts that are created during ones lifetime are known as inter vivos trust. There are two types of income from trusts, principal this is the original amount put into the trust and includes capital gains, stock dividends or proceeds from the sale of assets. Fiduciary income is income made from the principal, but not necessary effecting the principal i.e. annual interest, receipts and dividends from stocks. If income was a cow then the principle would be the cow and fiduciary income would be the milk produced from the cow. It is important to know the difference as sometimes beneficiaries are not entitled to the principle only the income and tax rules can differ significantly depending which category the income falls into.

Two general types of trusts in the US are;

Grantor Trust – This is a transparent entity and is treated as owned by the Settlor. This is not taxed as a trust and the owner is taxed directly as if the trust did not exist. This is preferred when the Settlor is not a US person, but the beneficiaries are.

Non-Grantor Trust – Separate entity, treated as for the benefit of the beneficiaries. The trust is taxed as an individual minus a deduction for any amounts distributed to the beneficiaries as the beneficiaries would then become liable for tax on these amounts.

A particular type of US trust that has numerous advantages is the Credit Shelter Trust. This allows married couples to split assets. The purpose of this is that upon the death of a spouse his or her part of the trust can be kept for the surviving spouse or the children. Because the assets are still kept separate and the surviving spouse does not have full rights to the principle of the credit shelter of the spouse who has passed these fall generally below applicable credit granted by the Internal Revenue Code. Another advantage of the ‘Credit shelter’ is that any future appreciation of trust asset that pass to either children or grandchildren are free from estate tax on the increased value since the estate tax value was ‘locked in’ at the first spouse’s death. A disadvantage is that this can only be used by married couples, persons who are not married trying to use the same structure will be liable for the gift tax.

For more information regarding USA Trusts please follow the link below or call us on our offices Telephone Number: 44 20 7097 1385
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